Everyday UK items that could go up in price after Donald Trump attack on Iran

Oil prices has risen to a five-month high - threatening to hit British households in the pocket.

Brent crude topped $80 a barrel in early trading, before falling back to $78 by lunchtime on Monday. It has been low as $61 as recently as early May, before Israel launched its first missile strikes on Iran. There are fears that the price could jump to $110 a barrel or beyond, if the crisis deepens.

The increase, fuelled by US President Donald Trump’s strikes on Iran’s nuclear facilities last Friday, risks feeding through to different aspects of everyday life, depending how the latest twist in the Middle East conflict pans out.

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Fuel prices

The most obvious shorter-term impact of higher oil prices is the price paid at the pump. Drivers in the UK had seen some reprieve from a spike in the cost of petrol and diesel, but that could all change.

RAC head of policy Simon Williams said: “The average price of a litre of petrol has increased by 1.5p to 133.5p in the last week while diesel has gone up by 2p to 140p.

“Although the cost of a barrel of oil jumped by $5 to $74 straight after Israel’s June 13 attack on Iran, so far it hasn’t climbed much higher. It’s now at trading around $77 - $12 a barrel more expensive than it has been for the last three months - which is not yet enough to cause a major hike at the pumps.

“As retailer margins have been high for some time, the oil price rise has squeezed these to fairer levels for drivers. If, however, retailers are set on maintaining margins of around 12p a litre, we may well see the average price of fuel go up further.”

He added: “It’s also important to note that the oil price is a long way off the $137.72 seen in the early days of the Ukraine war in spring 2022, which led to average prices reaching record highs in the summer of 191.5p for petrol and 199p for diesel.”

Air fares

Falling oil prices had led to lower air fares for passengers, with hopes this could be sustained over the peak summer months.

Any increase in the cost of oil could therefore cancel out the savings, or lead to upward pressure in fares. That said, airlines have often long-term contracts to buy jet fuel, protecting them against short-term fluctuations.

Energy bills

Millions of households are set to benefit from cheaper energy bills, with Ofgem’s price cap falling from July 1. The average customer on a standard tariff will see prices drop by 7%, equivalent to £129 over the next year.

In reality, the cap is likely to change three more times more times over the next 12 months and wholesale prices - what suppliers pay for the energy they sell to us - is a big factor in whether it will keep falling, or rise back up.

Not only does the traded price of oil have a cut-across to wholesale gas prices, there is also a risk that the price of liquefied natural gas will rise if Iran restrictions shipments through the all-important Straits of Hormuz. That, too, could feed through to energy bills for households and businesses.

Wider inflation

The cost of living has remained stubbornly high for a host of reasons. While in the UK the Consumer Prices Index eased to 3.4% in May, it is still well above the Bank of England’s 2% target.

Oil feeds through into the cost of mainly things we consume, from of course fuel but also transporting goods and manufacturing. That could mean higher prices in shops for everything from food to toys and clothes. Any sharp rise in oil prices could therefore push inflation back up.

Interest rates

The Bank of England froze its base rate at 4.25% recently, as it waits to see the path for wage settlements and inflation. Economists think the Bank’s Monetary Policy Committee could next cut rates in August, but much could change between now and then.

Any sign of volatility may prompt the MPC to set on its hands, while it waits to assess the fall-out of the conflict on inflation and the economy. A delay to cutting rates is a setback for borrowers, including home buyers and others getting a new mortgage, but is better news for savers.

Are these risks overblown?

Only time will tell but it is worth keeping in mind that the oil price rise has been limited to date, with City traders judging that Tehran does not want to hurt its own source of income. As well as oil, Iran is also a major gas producer.

Set against that is a current oversupply of oil given the weakness of the global economy. The International Energy Agency last week predicted that oil supplies would will substantially outstrip demand. “In the absence of a major oil disruption, oil markets in 2025 look well supplied,” the IEA said.

But experts think oil prices could surge if Iran retaliates and closing the Straits of Hormuz, through which a fifth of the world’s oil supplies flow. US Secretary of State Marco Rubio said it would be “economic suicide” for Iran to close the passage.

Investors are weighing up the extent of the geopolitical risk premium in oil markets given the Middle Eastern crisis is yet to impact on supply. Ole Hansen, analyst at Saxo Bank, said: “All eyes remain on the Strait of Hormuz ... and whether Iran will seek to disrupt tanker traffic.”

Investment bank Goldman Sachs says Brent crude could briefly peak at $110 per barrel if oil flows through the critical waterway were halved for a month, and remain down by 10% for the following 11 months.
The bank still assumed no significant disruption to oil and natural gas supply, citing global incentives to try to prevent a sustained and very large disruption.

Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown, said: “At a time when there were signs that inflation was becoming a little less troublesome, the geopolitical situation has added a slick of fresh uncertainty into the mix, pushing up energy prices.”

Dr Eric Golson, associate professor of economics at the University of Surrey, urged caution. He said: “The news surrounding the closing of the Strait of Hormuz is over baked for the global economy.

“At the moment, it is unclear whether the Iranians can directly close the Strait. Even if they tried, their forces would be challenged quickly. Markets are assigning very low odds of this happening. Economically, if Hormuz were to close in the short run, there is currently such a global oversupply of oil (outside of Hormuz) that it is unlikely we would see record prices. The disruption would likely be very minimal.”