INFLATION TO RISE IN IRAN WAR ‘SHOCK’
BRITAIN risks a surge in inflation as the Iran war sends oil and gas prices skyhigh, experts warn.
It comes as the Bank of England stands ready to ramp up interest rates amid the cost-of-living squeeze.
Governor Andrew Bailey said yesterday: “War in the Middle East has pushed up global energy prices.
“You can already see that at the petrol pumps and, if it lasts, it will feed into higher household energy bills.”
Bank chiefs held interest rates at 3.75% – but warned
inflation forecasts may lead to bigger price rises than expected.
The inflation rate – measured by the Consumer Prices Index – is currently at 3% but there are fears it could hit 4% this year, increasing pressure on hard-up households.
Defence Secretary John Healey confirmed the UK is ready to “step up” its defensive support for Gulf states after Tehran attacked energy facilities across the region. Oil prices surged to $119 a barrel yesterday before retreating to $113.
Sir Keir Starmer and the leaders of France, Germany, Italy, the Netherlands and Japan condemned Iran’s attacks on ships, oil and gas sites plus its “closure” of the Strait of Hormuz shipping route.
They added in a statement: “We call on Iran to cease immediately its threats, laying of mines, drone and missile attacks.”
The leaders also expressed their “readiness to contribute to appropriate efforts” to reopen the key Gulf passage and take “other steps to stabilise energy markets”.
The war has spooked the mortgage market, sparked claims of profiteering at forecourts and may see millions of squeezed households facing energy bills up to £300 higher for at least the next year as their spending power drops. Some
observers fear watchdog Ofgem’s annualised price cap, which sets the maximum unit price of gas and electricity, may top £1,900 over autumn and winter.
From April 1 to June 30 the limit for a typical dual-fuel household paying by direct debit is £1,641.
Higher wholesale costs, leading to dearer fuel, are derailing bids to cut inflation to the 2% target.
The Bank left interest rates unchanged in the first unanimous vote by the nine members of its monetary policy committee since September 2021. Mr Bailey said last night the best way to stop rates rising was to reopen the strait.
Further cuts are “not on the horizon” – and he hinted at increases to combat inflationary shocks.
Traders predict up to two rises this year, taking rates to 4.25%.
Mr Bailey said the war will also put pressure on food prices. He told LBC’s Andrew Marr: “The duration of this problem is crucial.
“The best way to solve this situation is not through monetary policy. Frankly, reopening the Strait of Hormuz is the best thing to do. Get the energy market back on its normal footing.”
Asked about the 2% figure, he said: “We are fully committed to the inflation target and our job, frankly, is to deal with the shocks. I wish they were not happening, but they are.”
Even a short conflict is likely to leave energy prices elevated for a long time. If the war escalates, inflation may be pushed up further.
Benchmark Brent crude oil soared in price after Iran’s retaliation crippled global supplies and analysts fear the $200 a barrel mark could be reached if the titfor-tat onslaughts continue.
The flow of oil and gas has halted as Tehran’s forces block the route which normally handles a fifth of the world’s oil, sparking queues at filling stations across the UK.
Meanwhile calls have grown for ministers to axe September’s planned fuel duty rise.
Howard Cox, founder of lobby group Fair Fuel UK, said: “Oil is 60% more than it was at the beginning of the month...we are going to be hit with rocketing pump prices.
He said: “The impact on the economy, inflation, growth, GDP, jobs and business investment is going to be catastrophic.” RAC data shows petrol is 10p a litre dearer than the day the US-Israeli attacks began. Unleaded was 132.83p a litre on February 28 and is now 142.62p; diesel has soared from 142.38p to 162.66p. Fighting intensified after Israel bombed Iran’s South Pars gas field on Wednesday, triggering reprisal strikes on energy infrastructure in Qatar, Kuwait and Saudi Arabia. The 9,700sq km Gulf site is the world’s largest gas field and holds 51 trillion cubic metres. Ownership is shared with Qatar. European natural gas prices are more than double pre-war levels and facilities at Ras Laffan in Qatar were wrecked by Iran’s retaliatory missiles.
The site produces a fifth of global gas supply and the attacks sparked a response by the UK government.
Admission
Trade minister Chris Bryant said: “We’re worried [about] energy prices [but] we need to be less reliant in the future on oil and gas.
“That’s why it’s so important... that we develop a strategy for the UK to supply as much of our renewable energy as we possibly can.” The Treasury is taking in an extra £91million a month in VAT on increased petrol and diesel sales
– more than £1bn a year. Fuel duty, a form of excise tax, is levied at a flat rate of 52.95p a litre for both petrol, and diesel and has been frozen since 2011-12.
VAT is also charged on both the product price and the duty, at 20%.
Filling an average family car has risen by up to £14 in three weeks.
Mr Cox urged: “Cut fuel duty now and promise not to put it up for the remainder of this parliament...and make sure the 5p fuel duty cut (implemented by Rishi Sunak during the Covid pandemic) is not reversed and also make damn sure opportunistic profiteering doesn’t take place.
“One of the things I would like to see is VAT taken off fuel duty because we have this double taxation...which is totally immoral. We have got to put pressure on MPs because they are not representing us, they are not representing motorists and they are not doing anything good for the economy.”
Rob Wood, chief UK economist at research firm Pantheon Macroeconomics, said: “Inflation would, on current energy prices, reach the psychologically important 4% level, which research finds leads households to raise their inflation expectations more aggressively.
“A quick de-escalation of threats over gas infrastructure would likely mean a sharp unwind of the gas price spike. Uncertainty is very high and, as we all know...volatility is high too.”
Jenny Ross, the editor of Which? Money, said: “Conflict in the Middle East has upturned economic forecasts and introduced massive new inflationary pressures.
Acting
“Mortgage rates have risen sharply in recent weeks and though the Bank has held rates at 3.75%, this trend is likely to continue. [Mortgage holders] coming to the end of their fixed-rate terms should start looking for a new deal.”
PM Benjamin Netanyahu said yesterday Israel would hold off on further attacks on Iran’s South Pars gas site at Donald Trump’s request.
It was suggested the pair were no longer acting in lockstep after Mr Trump fumed the US “knew nothing” about Israel’s initial blitz.
Mr Netanyahu declared: “Israel acted alone against the gas compound. President Trump asked us to hold off on future attacks, and we’re holding out.”
He used a lot of his TV address to deny that he had dragged the US into the war, saying Mr Trump had told him more than a year ago: “We’ve got to make sure that Iran doesn’t have nuclear weapons.”
HISTORIANS will debate whether Donald Trump was justified in taking on the Iranian regime, but right now it is clear the conflict is going to result in higher prices.
Inflation had been expected to glide down to the Bank of England target rate of 2% later this year, but it is now expected to be close to 3.5% in March.
Homeowners hoping to renegotiate their mortgages will shudder at the Bank signalling it could now raise interest rates to put a brake on prices.
It was no surprise the key rate was left at 3.75% yesterday, but households are being squeezed by the high cost of borrowing.
Oil prices have surged as the Iran crisis has unfolded and there is little sign of it de-escalating.The rocketing cost of energy triggers memories of the last price shock in the wake of Russia’s invasion of Ukraine.
It is intolerable that even in peacetime we pay more for power than almost any other developed country.And it is frightening we are so dependent on imports.
Our refusal to make the most of oil and gas reserves is an ideologically driven act of self-destruction. Keeping the lights on at an affordable price should be a national mission – and this in no way requires turning a blind eye to the reality of climate change.
Britain will one day have clean, plentiful and affordable energy. But it will be decades before renewables and a new generation of nuclear reactors provide the energy security we need.
Home-sourced oil and gas have a critical role in delivering dependable power.
Labour is terrified by the rise of the Greens but it should give our brilliant engineers the licences and support they need to get drilling.