How the Israel-Iran Conflict is Driving Up UK Living Costs
From rising fuel prices to mortgage hikes, the conflict between Israel and Iran is hitting UK household budgets. Here is how your finances are being affected.
The escalating conflict between Israel and Iran is beginning to ripple through the UK economy, impacting everything from the cost of a commute to the stability of the housing market. Economists warn that while the full extent of the financial fallout remains tied to the duration of the hostilities, households are already feeling the pinch.
Pain at the Pump
Motorists have seen an immediate surge in fuel costs. According to the RAC, petrol prices have climbed to an average of 157.02p per litre, a 24p increase since the conflict intensified. Diesel has seen an even steeper rise, jumping 47p since March to reach 189.42p per litre.
For a typical family car with a 55-litre tank, this translates to an extra £13 for petrol and £26 for diesel per fill-up. Analysts suggest that for every $10 increase in the price of crude oil, pump prices generally rise by about 7p per litre. Beyond the forecourt, these rising transport costs are expected to bleed into supermarket prices as logistics become more expensive.
Mortgages: The End of Falling Rates?
Hopes for a steady decline in mortgage rates have been dashed. As lenders face rising funding costs and shifting expectations for central bank policy, they have moved quickly to hike interest rates.
Data from Moneyfacts reveals:
According to the RAC, petrol prices have climbed to an average of 157.02p per litre , a 24p increase since the conflict intensified.
- Two-year fixed rates: Averaging 5.89%, up from 4.83% in March (the highest level since July 2024).
- Five-year fixed rates: Now averaging 5.78%, the highest since late 2023.
Market choice is also tightening. Approximately 1,500 residential mortgage products have been withdrawn from the market as lenders struggle to price products amid rapid economic shifts.
Energy Bills and Heating Oil
While the Ofgem price cap currently provides some protection for gas and electricity users in England, Scotland, and Wales, this safety net is temporary. Current forecasts from Cornwall Insight suggest that annual bills for a typical dual-fuel household could rise from £1,641 to £1,871 by the summer if wholesale costs remain elevated.
The impact is even more acute for rural households using heating oil, which is unregulated. In response, Prime Minister Sir Keir Starmer has announced £53 million in support for vulnerable heating oil users, to be distributed via local and devolved authorities.
Inflation and Interest Rates
The Office for Budget Responsibility (OBR) had previously projected inflation to settle near the Bank of England’s 2% target. However, those calculations preceded the recent airstrikes.
While experts do not expect inflation to return to the 11.1% peak seen in 2022—largely because the current conflict does not impact food staples like wheat in the way the Ukraine war did—the downward trend has stalled. Consequently, the Bank of England, which recently held rates at 3.75%, may now consider raising rates rather than cutting them to keep inflation under control.
Travel and Leisure
For those planning spring or summer getaways, the conflict may lead to higher fares. Jet fuel prices have spiked, and as airlines exhaust their "hedged" fuel supplies, they are likely to pass these costs on to travelers or reduce flight frequencies to volatile regions.
As the geopolitical situation evolves, the UK's path to economic recovery appears increasingly tied to the stability of the Middle East.
