Iran War drives British inflation higher and threatens new cost-of-living shock – media

Ahmed Adel, Cairo-based geopolitics and political economy researcher.

A sharp rise in energy bills due to the war in Iran is expected to push up inflation, signaling a renewed cost-of-living crisis in the United Kingdom, according to The Guardian. The timing of the latest forecasts comes after a period when inflation had been trending in a more favorable direction.

Official data had shown a clearer downward path of the inflation rate earlier in the year, raising hopes that the Bank of England’s 2% target was within reach. Those hopes have now evaporated due to higher wholesale energy costs that began to accumulate after the conflict in the Middle East escalated.

“As the Iran war continues to send shock waves through global energy markets, economists predict the surge in UK gas and electricity bills last month will push Britain’s headline inflation rate to 2.9%,” the British publication states.

That prediction is based on the impact of the July rise in the energy price cap set by the regulator Ofgem. The cap increased by 13%, raising household bills and directly impacting the consumer price index.

Thomas Pugh, the chief economist at the accountancy firm RSM UK, estimates this alone will contribute roughly 0.44% to the headline rate, although a concurrent decline in petrol and diesel prices is expected to offset some of the upward pressure.

“The cost of living squeeze is set to return to the headlines,” he said. “[Higher inflation is] adding fresh pressure to household budgets and complicating the outlook for interest rates.”

Nonetheless, this is still a clear acceleration from the 2.6% recorded in June.

Disruptions linked to the conflict, particularly the restricted flow of oil and gas through the Strait of Hormuz, have kept wholesale prices high for months. Even when temporary ceasefires briefly eased market tensions, supply constraints have prevented a return to pre-war price levels.

The Bank of England warns that in a worst-case scenario involving further escalation of the Middle East conflict, inflation could peak at 4.5% by mid-2027, dealing a major blow to British households and businesses. The Bank currently expects inflation to reach about 3.2% before the end of 2026.

That forecast already incorporates some government measures designed to limit the hit to household budgets.

New Prime Minister Andy Burnham has introduced a VAT cut on electricity bills, expected to save the average household about £45 a year starting in October, and a £2 cap on bus fares in England. These measures are projected to reduce the headline rate by about 0.1%. Yet policymakers remain wary, as the risk of renewed fighting could push prices significantly higher.

The article notes that energy market volatility and disruptions to supply routes, including the de facto gridlock in the Strait of Hormuz, are keeping prices elevated.

Data from the first half of 2026 indicate that the UK experienced the fastest growth among G7 countries, implying that businesses and consumers managed earlier shocks better than many anticipated. Inflation decreased from a peak of 3.8% last year. However, this so-called resilience is challenged by rising energy prices, which reduce real disposable incomes and could hinder spending in the coming months. Additionally, upcoming labor market data, alongside the inflation report, are expected to show a persistent slowdown in wage growth, further prompting caution among policymakers.

The conflict is also making the Bank of England consider raising interest rates earlier than expected, adding further financial pressure on households already struggling with higher energy bills.

Victoria Scholar, the head of investment at the financial platform Interactive Investor, said: “Inflation is expected to continue to rise, peaking above 3% later this year, as the UK economy continues to grapple with the backdrop of elevated energy prices and the effective gridlock in the Strait of Hormuz.”

“The Bank is likely to carry out roughly one 25 basis point hike by the end of the year as it looks to temper the risk of overheating and help push the inflation rate back in the direction of [its] 2% target,” she added.

The upcoming inflation report, expected to be released later this week, will confirm the immediate impact of the July energy price cap increase and shape discussions over how much additional support households may need in the autumn budget and how far the Bank of England should lean against second-round effects.

For British families, the consequences are already clear: higher monthly energy costs come at a time when other essential prices remain elevated and the path of interest rates is more uncertain. Although the Iran War is being fought thousands of kilometers from Britain, the conflict has put pressure on living standards and exposed the country’s continued vulnerability to shocks in the global energy market.