The resumption of conflict between the United States and Iran is poised to create economic headwinds for the United Kingdom's new Prime Minister, Andy Burnham, as concerns mount over rising energy bills, food prices, and mortgage rates. The renewed hostilities have sent fresh shocks through the global economy, impacting household budgets just as Burnham takes office.
The cost-of-living squeeze is already evident, with energy prices climbing. The UK's energy regulator, Ofgem, increased the energy price cap by 13% at the beginning of July, raising the typical annual bill by £221 to £1,862. Ofgem is expected to announce further adjustments to the cap in August, potentially leading to increased costs for households as the winter months approach.
The international situation has been a significant factor in the cost of living outlook since February, when former President Donald Trump initiated military actions against Iran. These actions initially caused oil prices to surge, contributing to higher prices for gasoline, electricity, and gas, along with fears of more expensive food. Although a peace deal last month offered temporary relief, its collapse has re-exposed households to these pressures.
Motorists are experiencing the effects, with petrol prices rising by 2 pence per liter since a three-month low on July 6. Analysts predict further increases as the cost of a barrel of oil has risen from the low $70s to the mid-$80s in less than two weeks.
Food prices are also subject to volatility. While official figures for May showed food price inflation had fallen to 2.2%, experts warn that the renewed conflict could reverse this trend. The prospect of rising inflation has rekindled concerns about potential interest rate hikes later in the year. Lenders have begun to react, with average mortgage rates increasing for the first time since Easter over the past week, as reported by Moneyfacts.
Consumer price index inflation figures for June, due this week, are anticipated to show a slight decrease to 2.6% from 2.8% in May. However, an increase in July is considered likely if Middle Eastern oil and gas supplies are disrupted by the potential closure of the Strait of Hormuz.