UK Cost of Living: Iran War Fuels Mortgage, Energy & Food Price Hikes

Britons are bracing for another cost of living squeeze as the escalating conflict in the Middle East sends ripples through global markets, impacting everything from mortgage rates to grocery bills. While the immediate future remains uncertain, early indicators suggest a significant and widespread economic impact is already taking hold.

Mortgage Market in “Catastrophic” Condition

The UK mortgage market is experiencing what experts are calling a “catastrophic” shock. In just weeks, nearly 1,000 mortgage products have been pulled by lenders, responding to increased economic uncertainty. Borrowers seeking a new two-year fixed-rate mortgage now face paying approximately £900 more annually than before the outbreak of hostilities, based on a £250,000 loan over 25 years. This surge, dubbed “Trumpflation” by some analysts, is directly linked to rising borrowing costs.

The Bank of England’s decision on Thursday to hold interest rates at 3.75% is now being reassessed. Prior to the conflict, expectations were for rate cuts; now, the conversation has shifted towards potential rate rises. Approximately 1.8 million fixed-rate mortgage deals are set to expire in 2026, leaving a substantial number of homeowners vulnerable to these increased costs, according to Rachel Springall, a finance expert at Moneyfacts. The average two-year fixed mortgage rate has already risen by around 0.5% to 5.35% since last week, with further increases anticipated.

Energy Bills Set to Climb

The energy sector is also feeling the strain. Experts predict that the conflict will add more than £300 per year to a typical household energy bill. While the energy price cap in England, Wales, and Scotland currently shields consumers from immediate market volatility, this protection is temporary. From April to June, the average annual dual-fuel bill is capped at £1,641. However, analysis from Cornwall Insight suggests a jump to £1,972 per year from July.

The impact is already being felt acutely by the 1.5 million UK households that rely on heating oil, which is not protected by the price cap. The cost of heating oil has more than doubled since the conflict began, prompting the government to allocate £53 million in support for low-income households.

Fuel Prices at the Pump Surge

Motorists are already experiencing higher prices at the pump. Average petrol prices have risen by almost 12p per litre since the start of the conflict, reaching 144.51p, while diesel has increased by 24p to 166.24p. The RAC warns that average petrol prices could reach 150p per litre if oil prices remain elevated. The rising cost of fuel is not limited to drivers; it’s expected to translate into higher prices for goods and services due to increased transportation costs.

Grocery Bills Under Pressure

The impact on the weekly shop is expected to be more gradual, but nonetheless significant. Surging energy prices affect businesses across the supply chain, and rising costs for crucial farming inputs like fuel and fertilizer are already being felt. Disruptions to shipping routes, particularly through the Strait of Hormuz, are exacerbating the problem. Analysts at Jefferies predict that food price inflation will accelerate towards the end of the year. Asda’s executive chair, Stuart Rose, succinctly stated that surging energy prices are “to business what water is to life,” highlighting the pervasive impact on the food system.

Holiday Costs Also Rising

The travel industry is also bracing for impact. Airlines are facing higher jet fuel costs, which are expected to drive up airfares. While airlines have some protection through fuel hedging, these contracts will eventually expire, exposing them to higher prices. Travel insurance costs are also increasing, particularly for destinations in or near the affected region. Some travel providers are already seeing a shift in bookings, with increased demand for destinations like Portugal and the Balearic Islands as travelers avoid areas perceived as higher risk.

The current situation represents a significant setback for the UK economy, which had begun to show signs of recovery. The duration and intensity of the conflict will be key determinants of the long-term economic consequences. Consumers and businesses alike should prepare for a period of sustained economic uncertainty and rising costs.