British households have been told to brace for a surge in inflation and multiple interest rate hikes this year after surging oil and gas prices sparked by Donald Trump’s war on Iran.
Tehran has launched a series of retaliatory strikes on energy sites in the Gulf since the conflict began, and has throttled the key shipping route of the Strait of Hormuz.
Israel, meanwhile, has targeted Iran’s South Pars gas field – the largest of its kind in the world.
The benchmark Brent crude oil currently sits at around $110 a barrel, compared to $72 before the war, while a unit of wholesale gas stands at 150p – almost double the 77p price just three weeks ago.
It adds up to bad news for the cost of living in the UK, where economists are now predicting inflation could hit 5% this year, while interest rates could be hiked two or even three times.
Sky News’s economics and data editor Ed Conway described the sudden shifts as “extraordinary”, with the pre-war expectation having been for inflation to fall to 2% and for the Bank of England to cut interest rates twice.
War in Iran – follow the latest
The Bank announced on Thursday it would be keeping the base rate at 3.75% for now, but some City traders are anticipating increases in June, July, and December, which would take it up to 4.5% by the end of 2026.
Mortgate rates are already being impacted. The typical two-year fixed rate has jumped to its highest since April 2025: from 4.83% at the start of the month to 5.3% on Thursday, according to financial information firm Moneyfacts.
An average five-year fixed deal stands at 5.35% – the highest level since August 2024.
Meanwhile, governments are facing a sharp increase in borrowing costs. In the UK, they’ve gone up at the fastest rate since the Liz Truss mini-budget of 2022 – further damaging the country’s growth prospects.
Read more from Sky News:
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Starmer calls for deal with Iran
The government has announced measures to help those hardest-hit by the war’s economic impact, including a £53m package for households who rely on heating oil.
Sir Keir Starmer had already made the cost of living a focus of recent months, but acknowledged families would feel the pressure of more rising costs as a result of the conflict.
The prime minister said the longer the war goes on, “the bigger impact on the cost of living”.
“The best way forward is a negotiated settlement with Iran,” he said on Thursday night – a position that has seen him draw the repeated ire of the White House.
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Energy strikes a ‘serious escalation’
Sir Keir’s opposition to the war and reluctance to join the US-Israeli attacks is largely supported by the public, but Defence Secretary John Healey said the UK would “step up” its defensive support for its Gulf allies.
Speaking on a visit to Dreghorn Barracks in Edinburgh yesterday, Mr Healey said Iranian attacks on energy sites in Saudi Arabia, Qatar, and Kuwait were a “serious escalation”.
RAF jets are among the British military force already deployed to the Middle East, and UK military planners are working with the US and other allies on proposals for reopening the Strait of Hormuz.
The prime minister will be speaking later today during a visit to the South East – follow live updates in the Politics Hub. For more financial news, read Money.
