The UK’s path toward lower inflation faces a significant setback as escalating conflict in the Middle East puts upward pressure on global energy markets. The Office for Budget Responsibility (OBR) warns that if current price trends persist, the headline inflation rate could climb back to 3% by the end of 2024. This shift marks a departure from previous forecasts that suggested a much faster return to the government’s 2% target.
The volatility stems from the recent military actions involving the US, Israel, and Iran, which have sent ripples through the oil and gas sectors. While Brent crude prices fluctuated wildly this week—hitting $100 before settling near $85—the overall trajectory remains higher than pre-conflict levels. David Miles of the OBR noted that the suddenness of the military escalation has forced economists to constantly recalibrate their projections.
Rising costs are already manifesting at British petrol stations, where fuel prices are climbing at their quickest pace in two years. Average petrol prices have jumped to 135.67p per litre, while diesel has seen an even steeper increase to 149.01p. Chancellor Rachel Reeves has expressed concern over “price gouging” at the pumps, noting that some retailers have pushed prices as high as 180p per litre despite fluctuations in crude costs.
This inflationary pressure complicates the Bank of England’s upcoming decisions regarding interest rates. Financial analysts in the City have largely abandoned hopes for a rate cut next week, with some suggesting that borrowing costs might even need to rise to curb the new wave of price increases. For the Labour government, this represents a major hurdle in their mission to provide cost-of-living relief to struggling households.
The government’s ability to intervene is further constrained by strict fiscal rules and limited budget “headroom.” While the previous administration spent £50bn on energy subsidies following the invasion of Ukraine, the current Treasury has much less financial flexibility. As the conflict continues, the primary strategy for stabilizing the UK economy appears to be centered on international efforts to de-escalate the Middle Eastern crisis.