The UK faces a new wave of economic pressure as the repercussions of the war in Iran ripple through global markets.
Despite being continents apart, the interconnectedness of energy markets and supply chains impacts the daily reality of British families and businesses. UK Chancellor of the Exchequer Rachel Reeves warned that while "this is not our war, but it is pushing up costs for UK families and businesses," signaling a challenging phase marked by rising energy and commodity prices, and clouded by economic uncertainty.
Since the outbreak of the regional war in late February, the UK has been grappling with mounting cost-of-living pressures that analysts say have yet to peak. The war in Iran directly impacts energy, food, and transportation prices, presenting compounding challenges at a time when the economy has not yet fully recovered from the high inflation following the Russia-Ukraine war, which caused an energy shock and slowed economic growth in the UK.
At the heart of the current crisis lies the surging oil and gas prices driven by disruptions in global supplies from the Arabian Gulf and vital shipping routes, particularly the Strait of Hormuz. Higher energy bills have impacted transportation and production costs across various sectors.
In everyday life, the effects of the war are increasingly visible as they face higher energy bills, rising prices for basic goods, and more expensive travel costs, prompting them to change their consumption habits, such as reducing energy use at home or seeking cheaper alternatives to food products.
As these pressures continue, many families find themselves forced to rearrange their financial priorities and, in some cases, resort to savings or borrowing to cover basic expenses.
In this context, an expert on international affairs and director of the Council for Arab-British Understanding (Caabu) Chris Doyle told QNA that the closure of the Strait of Hormuz has had "enormous repercussions” on both the global and UK economies, adding that policymakers are yet unable to fully assess the scale of the damage of the war.
He noted that it is not just about oil and gas, but also other commodities such as helium, fertilizers, and rising food prices, further driving up living costs.
He pointed out that the state's general budget will bear a heavy burden due to increased government borrowing to provide bailout packages for companies to prevent their collapse due to rising costs, all at a time when the budget is already suffering from a deficit.
He explained that European governments, including the UK, will incur enormous expenses to support jobs and citizens, as was the case during the COVID-19 pandemic. With a high national debt, it is unclear how much the government can intervene to help the economy.
Despite promises made by UK Prime Minister Keir Starmer that the government would not stand idly by, he acknowledged that these global disruptions are beyond the control of any government. He said efforts are underway to mitigate the impact without jeopardizing fiscal stability.
The challenges faced by the UK economy can be felt by the average citizen, translated as higher prices and daily pressures. The government fears that the economic fallout from the war will be an external shock felt by almost every household and will not be easy to contain, UK Chief Secretary to the Prime Minister, Darren Jones, said. Jones, who is part of a government team developing a strategy to address the war's impact on the UK economy, warned that the pressures could persist even after the conflict ends, reflecting his concern about the prolonged nature of the crisis and its profound effect on the economy. The war's impact extends beyond energy, affecting food prices, a key component of every household's spending.
With rising fuel and transport costs, the cost of moving and storing goods has increased, as have the costs of agricultural and industrial production, including fertilizers, refrigeration, and manufacturing. Market estimates suggest that these combined factors are gradually driving up food prices, a trend consumers are already feeling in their daily shopping.
In this context, prominent Conservative Party politician Alun Cairns told QNA that the impact of the Iran war presents new cost-of-living challenges that require the intervention of the government to help reduce fuel and energy prices.
Cairns continued that the current level of fuel surcharges is a hot topic, and the government will have to reduce it. However, he said, the revenue the government receives from fuel surcharges is a key component of its budget, creating a real dilemma for the Secretary of the Treasury.
The British politician added that the biggest shock will be felt by families, as energy costs in the UK are already among the highest in the developed world, and the Iran war is pushing them to the next level. He explained that the risk lies in providing more aid to citizens and businesses, which leads to increased debt.
Higher energy costs will also put pressure on heavy industries such as steel, ceramics, and chemicals, potentially forcing them out of the market. Furthermore, higher fuel costs will increase the pressure on households and families already facing financial strain. "It seems that everything in the UK depends on fuel and energy," he concluded.
Cairns believes this shock is unprecedented. He noted that public finances are already under strain, warning that households and businesses will feel the pain. He anticipates higher inflation, increased bankruptcies, and rising unemployment, not only in the UK but across the developed world.
He explained that the cost of living has been a central focus of policy decisions for some time. This factor was dominant in the 2024 general election, which was influenced by the COVID-19 pandemic and the Russian-Ukrainian war, resulting in Labour's victory.
The current crisis is affecting consumer behavior. Retail sales show a decline in non-essential purchases. Economists warn that continued energy price increases could prolong inflation and delay income recovery, particularly for lower-income households that spend a larger share on essentials.
Economic experts believe this behavior reflects growing anxiety about the future, particularly given the persistent gap between wage growth and rising prices. The Institute for Fiscal Studies stated that continued high energy prices could prolong inflation and delay the recovery of real household incomes for years, not just months. Low-income households will be the hardest hit, as they spend a larger share of their income on energy and food.
The institute also pointed out that British households are already facing a prolonged period of weak real income growth, and the war is adding a new layer of economic pressure. It added that any further increase in energy prices will quickly translate into a decline in living standards. What distinguishes this crisis is its coincidence with weak growth, increasing the risk of entering a stagflation period.
Economists at the Bank of England warn that continued inflationary pressures could force the bank to keep interest rates high for a longer period, which would increase the cost of mortgages and put pressure on the housing market. They indicated that monetary policy faces a difficult balancing act between curbing inflation and supporting growth, in an environment of external conditions that are not easily controlled.
Analysts believe that the psychological impact of the crisis is no less important than its economic impact, as uncertainty leads to a decline in public confidence in the economy, which could affect investment and spending decisions in the medium term. Furthermore, the continued discussion of the cost-of-living crisis is fueling anxiety among citizens. While the government and analysts monitor developments, the decisive factor remains the course of the war and its impact on global energy markets. If the disruptions persist for an extended period, prices are likely to remain high or even rise further.
If the situation calms down, prices may begin to stabilize gradually; even then, the impact will linger. The UK Prime Minister summarized the situation by saying that the challenge we face today is global, adding that addressing it requires patience and responsible policies that balance supporting families with maintaining economic stability. This statement reflects an official recognition that solutions will not be quick or easy, and that the next phase will require careful management of economic priorities.
Given these circumstances, the UK appears to be facing a delicate economic period, where international factors are intertwined with domestic challenges in an unprecedented way, making the issue of controlling the cost of living more complex than ever. Between price pressures, slowing growth, and global uncertainty, policymakers find themselves facing a difficult test, while citizens continue to adapt to a new economic reality that is forcefully impacting their daily lives.