Iran conflict: what rising oil prices mean for UK households

The Office for Budget Responsibility (OBR) has warned inflation could hit 3% by the end of the year, pushing up daily living costs for consumers.

The prediction by the government’s economics watchdog is a result of the ongoing – and intensifying – Iran conflict. It has seen inflation move away from its downward trajectory both here in the UK and further afield.

One of the main factors putting upwards pressure on inflation is energy prices. These have risen sharply due to the disruption of oil and natural gas traffic through the Strait of Hormuz.

Driven mainly by these energy costs, the OBR expects daily living expenses to rise by around 1% more than initially estimated by the end of the year.

At the time of publication, it remains uncertain how long the conflict will last. But even a short-term interruption to oil and gas flows could have lasting consequences for manufacturing, transport and goods inflation.

Some UK consumers have started to feel the impact. For example, drivers are already seeing fuel prices quickly rise as a result of the conflict.

It is also likely that UK consumers will experience higher food and goods prices throughout the year, as increased transportation and production costs feed through to supply chains.

And with summer just around the corner, flights and holidays could become more expensive too. Airlines facing higher fuel bills may pass these costs on through increased airfares.

In the longer term, the conflict may also push insurance premiums up. For example, motor insurers could face higher payouts as the price of motor parts and materials rise. Home insurers could face similar pressures as building materials become more expensive.

Remortgaging or buying a house?

Banks are taking a cautious approach to lending amid the unstable geopolitical environment. Many lenders have reportedly withdrawn mortgage deals in response to the heightened level of risk.

This means that for those buying a home or remortgaging, the rates available are likely to have gone up in recent weeks. Until recently, borrowers could find fixed rate mortgage deals below 5%. However, recent reports indicate that average mortgage rates have climbed above this level.

Another sign of the cautious approach to the geopolitical risk is the decision by the Bank of England’s Monetary Policy Committee to keep the base rate flat at 3.75% at last week’s meeting. This will also fuel lenders’ moves to increase the interest rates on new deals.

Keeping the base rate unchanged also means that borrowing becomes more expensive, while saving becomes more attractive as returns are driven upwards.

Preparing for the unexpected

There are a number of ways consumers can reduce the impact of the volatility caused by the conflict.

For instance, it is worth keeping an eye on new savings products and switching to more competitive interest rates where appropriate. As energy prices remain unpredictable, risk-averse consumers may feel more comfortable moving to a fixed-rate energy tariff to protect themselves from potential price rises.

While we are in a period of uncertainty, investors can focus on building long-term financial resilience by investing through tax-efficient products such as individual savings accounts and pensions.

As the conflict continues, it may be worth seeking financial advice to ensure you can best navigate the headwinds and ensure your financial plans remain on track.

The value of an investment with St. James’s Place may fall as well as rise. You may get back less than the amount you invested. Past performance is not a guide to future performance.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.