UK living standards growth endangered by Middle East conflict as markets gain on Iran secret peace efforts
The fragile recovery in British living standards faces being wiped out by a fresh energy price shock, economists have warned, as global markets reel from the escalating conflict in the Middle East.
Analysis by the Resolution Foundation, published overnight, concludes that while typical working-age families are set for a £300 increase in living standards over the coming year, those gains are entirely at risk if oil and gas prices remain elevated. The think tank calculates that sustained recent price rises could add around one percentage point to inflation and £500 to typical annual energy bills.
Ruth Curtice, chief executive at the Resolution Foundation, stated: “This coming year is set to be a decent one for living standards, and a bumper one for poorer families, as wages and benefit support rise above the level of inflation. But a fresh energy price shock risks puncturing this good news.” The Foundation’s report, based on the Office for Budget Responsibility’s spring forecast, notes that lower-income households are set for a 3.9% or £800 rise, which would be the second strongest year for their living standards in two decades.
Volatile Markets and Dire Warnings
The warning comes amid extreme volatility in global energy markets and shipping lanes triggered by the conflict. The Strait of Hormuz, one of the world’s busiest maritime chokepoints, has seen severe disruption, with maritime traffic effectively closed since strikes on Iran began. The UK Maritime Trade Operations reported a container ship was hit by a projectile in the strait on Wednesday, causing an engine room fire.
Data from the MarineTraffic platform cited by Reuters estimated at least 200 ships, including oil and LNG tankers, remained at anchor off the coasts of major Gulf producers. The disruption has forced QatarEnergy to declare force majeure on liquefied natural gas shipments after attacks on its production facilities, and at least six major cruise ships have confined passengers on board.
This instability has sent shockwaves through financial markets. South Korea’s Kospi index plummeted 12%, with reports of panicked investors scrambling to exit leveraged positions. In London, the FTSE 100 clawed back earlier losses to trade 0.8% higher, led by energy and metals companies. Oil prices whipsawed, with Brent crude initially spiking to nearly $84.50 a barrel before falling back to $81.33 following a New York Times report that Iranian operatives had secretly reached out to the US about talks to end the conflict.
US stock index futures pointed higher on the news, though US Treasury Secretary Scott Bessent suggested President Donald Trump’s recently announced 15% global tariff would likely be implemented “sometime this week,” maintaining economic uncertainty.
Direct Hit to Household Bills
The immediate impact for UK consumers was spelled out by consultancy Cornwall Insight, which estimates the energy price cap could rise by 10% this summer if the surge in gas prices does not reverse. It has raised its forecast for the July-September Default Tariff Cap to £1,801 per year for a typical household, a £160 increase on the April cap.
Dr Craig Lowrey, principal consultant at Cornwall Insight, said: “This latest forecast puts the role of wholesale markets firmly back in the spotlight and illustrates how exposed UK households remain to international market movements.” He argued the events reinforce the case for greater home-grown renewable generation to reduce reliance on volatile global gas markets.
Some UK lenders have already paused plans for mortgage rate cuts, according to financial information website Moneyfacts, which said rising swap rates had caused some unnamed lenders to reconsider planned reductions. However, average two-year and five-year fixed mortgage rates saw slight decreases on Wednesday.
Broader Economic Repercussions
The economic reverberations extend beyond energy. The National Institute of Economic and Social Research (NIESR) warned that if the energy shock persists for a year, the Bank of England could be forced to raise interest rates back above 4%. Its analysis of a scenario where oil hits $100 a barrel and gas prices rise 50% suggests inflation could increase by 0.7 percentage points in 2026, dampening GDP growth.
Ed Cornforth, an economist at NIESR, said: “The Bank of England will have to contend with a shock to global energy prices, with the question of persistence hanging over their heads. This will cause problems for Rachel Reeves as financing costs increase.”
Professor Costas Milas of the University of Liverpool’s Management School cautioned that “wild volatility regarding energy prices also matters” for growth, arguing it would take time to settle even if conflict ceased.
Geopolitical tensions are also threatening trade. Spanish Prime Minister Pedro Sanchez’s criticism of the conflict prompted a threat from Donald Trump to halt trade with Spain. The EU has reminded the US president that a tariff deal signed last year stands, hinting at retaliation if breached. Analysts note Trump could target sectors like pharmaceuticals—Spain exported $1.15bn worth in 2024—using powers under Section 232 of the 1962 Trade Expansion Act.
As UK and European gas prices fell back slightly in daily trading, offering temporary relief, the overarching message from economists was one of severe exposure. The Resolution Foundation’s final assessment was stark: the medium-term picture for UK living standards remains bleak, with a highly uncertain immediate outlook where yesterday’s official forecasts “already look out of date.”
