The conflict in the Middle East, resulting in the closure of the Strait of Hormuz – a key transit route for oil and gas – has prompted global concerns about supply and a surge in oil prices from just over $70 in February to over $100, on average, in March. Uncertainty about how long the conflict will last and, often contradictory, statements from the US has prompted significant volatility in stock and bond markets through March. 

For consumers the first, most visible impact of the conflict has been pump prices, with the RAC reporting a record monthly rise in petrol and diesel prices in March. 

And while households will be shielded in the short-term from higher utility bills through April’s lower energy price cap, analysts, Cornwall Insights, estimate the recent supply shock could lead to a £288 increase in the price cap when it is reviewed again in July. There are also fears that supply disruptions could result in escalating food prices like those seen following the invasion of Ukraine.  

A further transmission is also likely to come from higher mortgage costs – notably for around 1.8 million households that will be refinancing this year. Gilts yields have been on a roller coaster since the start of the conflict and average rates on a 5-year fixed rate mortgage increased by over 60 basis points (at time of writing) compared with the end of February.

Prior to the conflict UK inflation looked to be on track to get back to target in the spring. Moderating wage growth at the start of the year and an easing in household inflation expectations would have supported a largely anticipated reduction in Bank Rate. At the March meeting of the Monetary Policy Committee (MPC) a number of members commented that they would likely have voted for a rate cut were it not for the inflationary risks that would come from a prolonged conflict. For the time being, a rate cut is off the table. 

Instead, markets have variously been pricing in at least one increase in interest rates this year. While the March MPC minutes took on a distinctly hawkish tone, the Bank of England governor warned markets that they were getting ahead of themselves in pricing in rate rises, noting that the Bank’s remit also includes causing ‘the least damage in terms of activity in the economy and in terms of jobs’. 

The economy is in quite a different place compared with the Ukrainian invasion – growth is slower and the labour market is weaker – which should help moderate second round effects from this price shock. 

However, there was clear movement in some components of the manufacturing index. In the UK and eurozone input costs surged to the highest level since late 2022 with firms reporting plans to pass these on in higher selling prices. Instability caused by the conflict also dented business optimism about growth in the year ahead.  

The ONS Business Insights survey confirms worries about supply chain disruption with 64 per cent of businesses concerned about supply chains in the next 12 months, up from around half in December. Of these around three-fifths cited worries about international conflict impacting supply chains and a third referenced shipping disruptions. Inevitably, worries are most acute across manufacturing. 

This tallies with a new survey from the Institute of Directors, which reported a significant overall deterioration in business confidence, with manufacturers at the sharp end – 69 per cent of manufacturers reported a negative impact so far, compared to a cross-sector average of 59 per cent. Impacts being reported include sharp increases in fuel and shipping costs, rising material prices – such as petrochemicals – and delivery delays

Consumers are worried, businesses are worried, policy makers and central banks are worried. The list of possible implications will inevitably expand the longer the conflict lasts, but the immediate inflation risk is topmost among the worries for the global outlook, particularly as it comes at a time when many economies (including the UK) are still experiencing above-target inflation. 

The OECD’s recent interim economic forecast update in March expects G20 inflation to come in at four per cent this year – 1.2 percentage points higher than its December forecast. UK inflation is also expected to come in at four per cent – the highest across developed countries. The forecast assumes a gradual fading of energy price pressures from mid-2026 with G20 inflation subsiding through 2027 to 2.7 per cent (2.6 per cent in the UK). 

The OECD also expects an easing in global GDP growth from a resilient 3.3 per cent in 2025 to 2.9 per cent this year (2026 forecast unchanged from December). Higher energy prices and the hit to disposable income is expected to be larger in energy import-intensive regions including the eurozone and UK, where growth expectations for 2026 have been cut by 0.4 and 0.5 percentage points respectively (to annual growth of 0.8 and 0.7 per cent).

The governments spring statement was announced (as planned) with little fanfare - no policy announcements, just an updated economic and fiscal forecast from the Office for Budget Responsibility. Given that not that much time had elapsed since the last forecast at the end of November, revisions to the economic outlook were little changed – GDP growth and inflation this year were downgraded, while the forecast for unemployment was nudged up a little. 

If, in addition, the government introduce household support measures in light of further cost of living pressure, this would also add to government borrowing in the near term – as was the case in 2022. Prior to the Ukraine war borrowing to fall gradually over the forecast period, but the substantial energy support package saw PSNB hold at around five per cent of GDP in subsequent 

years (clearly the other elements of the Truss mini-Budget made matters worse than might otherwise have been). 

No plans have been put on the table by government as impacts on energy bills will not crystalise until July. It has indicated that support, if needed, would be targeted towards the hardest hit households. Given the limited fiscal space available there are unlikely to be any easy choices. 

Every silver lining has a cloud. The rise comes as unemployment is ticking higher and labour market prospects have become particularly difficult for younger workers. Small business groups, include the Federation of Small Businesses, have pointed to the increased costs employers are incurring from the rise in minimum wage rates, as well as last year’s NICs increase. In addition, April also brings an increase in Business Rates. A sustained rise in costs caused by the Middle East conflict will put further strain on already squeezed cashflow for SMEs.

In March we published our quarterly Household Finance and Business Finance Reviews, rounding up activity in the final quarter of 2025 and the year as a whole.

With the conflict in the Middle East driving up UK mortgage rates, our latest research paper looks at how this could affect customers looking to refinance their loans this year. 

All our data releases can be found on the website, with full member data available on the UK Finance portal. 

Source: ONS, HM Treasury, Bank of England, EIA

*Q4 2026