Middle East conflict could push inflation up to 3 per cent by end of year, OBR says

Quizzed by MPs on the Treasury Committee earlier following the OBR publishing new forecasts alongside the Chancellor’s spring statement last week, Prof Miles said oil prices were currently about 20 per cent higher than they were before fighting escalated, and gas prices were up by about 50 per cent.

“If there’s no change in the picture on prices from now on forward, we estimate something like a 1 per cent higher level of consumer prices in the UK by the end of the year,” he said.

“We had thought, without taking all this into account, that the inflation rate in the UK might be pretty close to 2 per cent.

“Right now, if prices don’t change from where they are – both the spot prices and market expectations for futures prices, which is particularly important for the Ofgem price cap – we think the inflation rate would end the year not near 2 per cent, but nearer 3 per cent.”

Prof Miles said this would be “significant … yet not on the same scale as we experienced after the Russian invasion of Ukraine”.

Oil prices reached their highest level since 2022 on Monday, however since then the markets have calmed after US President Donald Trump suggested the military action would be a “short-term excursion” rather than a more prolonged war.

Mr Trump threatened “death, fire and fury” against Iran unless vessels were allowed through the Strait of Hormuz, a vital maritime oil and gas route.

The price of Brent crude was more than 8 per cent lower at just under 91 US dollars a barrel this morning, retreating from near four-year highs above 100 dollars on Monday.

Markets responded by recovering some of the recent ground lost in the sell-off, with the FTSE 100 Index up 1.6 per cent soon after opening, up 165.3 at 10,414.8.

But nervousness around the potential impact of higher energy costs still lingered. Last week, analysts at Cornwall Insight forecast that household energy bills could rise by 10 per cent from July after sharp increases in wholesale gas prices.

This means Ofgem’s price cap for July to September would surge to £1,801 a year for a typical dual fuel household – an increase of £160 or 10 per cent on April’s cap.

Rachel Reeves warned on Monday that America and Israel’s war with Iran is “likely to put upward pressure on inflation” over the coming months.

However, earlier, the Chancellor said that using public money to tackle spikes in heating oil prices is “not the solution”.

Domestic heating oil is used to warm around 1.5m UK homes – approximately 5 per cent – and is more common in rural areas.

This is particularly vulnerable to shocks like the Middle East war because there is no cap to limit the cost of heating oil in the way households benefit from regulator Ofgem’s price cap on gas and electricity bills.

The Chancellor told MPs: “There’s two things going on in terms of heating oil.

“First of all, you’ve got the conflict in the Middle East, which we’re trying to de-escalate.

“And second, you’ve got price gouging, and the way to deal with that is to ensure that customers are treated fairly and that companies are not ripping off their customers.

“That is why we’ve asked the CMA to look at the issues around heating oil.

“But we’ve got to get to the root of the problem, which is that vessels aren’t flowing through the Strait of Hormuz and some businesses are using this crisis as an opportunity to rip off consumers.

“Let’s deal with that, rather than throwing public money at something which is not the solution – price gouging and getting oil flowing is.”