There is no way around it: the war in Iran and the Middle East will be felt in the UK, and Keir Starmer has kicked off Labour’s campaign for May’s local elections by promising his government “will continue to assess the economic effects” of the conflict.
So what? This message will have done little to reassure voters worried about the cost of living. By closing the strait of Hormuz, the conflict caused the price of oil to spike by more than 60% in March, and the Bank of England has warned it could “crystallise” several existing economic vulnerabilities. The impact is already filtering into everyday life, affecting:
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mortgages
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petrol prices
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food inflation.
Shoots of hope. At the beginning of 2026, the UK’s economic prospects were underwhelming, but there were encouraging signs. The Bank of England had been steadily cutting interest rates, and inflation was due to come close to the government’s target of 2% this spring.
Hope shot through. The war on Iran threatens to derail this progress. Inflation is now forecast to climb to 3.5% in the third quarter of this year. Although this is well below the peak of 11% in 2022, traders are now betting that the Bank of England will raise interest rates twice in 2026.
Bricks and mortar. The impact on mortgages has been sharp. The average two-year fixed rate has jumped from 4.84% to 5.84%, the steepest rise since Liz Truss’s disastrous mini-budget. Five-year mortgages have climbed by a similar amount. Nearly 1,300 mortgage products have been pulled off the market, representing 17% of the total. This means less choice for consumers.
The coming crunch. About 1.8m households are due to remortgage this year. The hardest hit are people coming off five-year deals that were set when the cost of borrowing was practically zero. According to Moneyfacts, their repayments could rise by as much as £444 a month. Typical borrowers looking to remortgage face an extra £150 a month.
Pinched at the pump. The average UK petrol price has risen to £154.45 a litre, an increase of nearly 22p. Diesel has jumped by 42.9p to £185.23. The RAC predicts both to rise further. A rough rule of thumb used by analysts is that every $10 rise in the barrel of oil pushes up petrol pump prices by 7p.
Jet-setters. The price of jet fuel has more than doubled, sending airfares soaring and forcing airlines around the world to cut flights to protect their margins. In normal times, fuel accounts for 20 to 30% of a carrier’s costs. The UK is particularly exposed. Although Britain sources most of its oil and gas imports from the US and Norway, it gets about 25% of its jet fuel from Kuwait.
Knock-on. High fuel and fertiliser costs trickle down to other goods. The Food and Drink Federation expects food inflation to climb above 9% by December 2026, roughly triple the expected rate of 3.2%.
Keeping the lights on. Despite all this, household energy bills have come down. This is because the new energy price cap of £1,641 came into force on 1 April, a reduction of about 7%. The limit was set before the war. It only lasts until July, when the new limit is predicted to rise by almost £300.
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The good news is that any rise will come during the summer months, when radiators are switched off. Labour will not offer universal help with bills, the option taken at vast expense by Liz Truss in 2022. Instead, it is weighing targeted support for low-income households.
New normal. Singapore’s United Overseas Bank expects Brent crude oil to trade at $110 for the next few months before easing to $90, staying at this level until at least the beginning of 2027. This would keep prices high. The price was about $60 at the start of 2026.
Keep calm and carry on. Labour has announced £53m to help people reliant on heating oil, which has doubled in price. It is also weighing targeted support to help low-income households with their energy bills once the current price cap expires. But for the most part, its advice is not to panic. On Tuesday, chief secretary to the Treasury James Murray said “people should go about their lives as normal”.
Across the channel. Rachel Reeves is under pressure to remove VAT from energy bills and abandon her plan to reverse the current 5p cut to fuel duty. In Europe, Spain has taken the strongest measures, approving a €5bn support package that includes steep cuts to energy taxes. Portugal has cut its diesel tax, while Germany has limited the ability of petrol stations to raise prices.
Photograph by Oli Scarff/AFP via Getty Images