The Office for Budget Responsibility (OBR) has adjusted its UK inflation forecast, suggesting the rate could hit 3% by the end of the year. This adjustment is a direct response to the energy price volatility caused by the military conflict involving the US, Israel, and Iran. The watchdog’s analysis indicates that the energy shock will have a “material and significant” impact on the cost of living for British families.
Wholesale energy costs have seen substantial jumps, with gas prices rising by 50% and oil prices increasing by nearly a fifth. David Miles of the OBR explained that if these prices are sustained, the UK will face an inflation rate roughly 1% higher than previously expected. This reality complicates the government’s efforts to steer the country toward a more stable economic environment.
Chancellor Rachel Reeves has been vocal about the need for petrol retailers to act fairly, as fuel prices rise at their fastest rate in two years. She has warned against “price gouging” and noted that the government is closely monitoring pump prices, which have topped 180p per litre in some locations. Despite the pressure, the Treasury has not yet moved to adjust fuel duties or provide new subsidies.
The likelihood of interest rate cuts has decreased significantly following the OBR’s latest comments. The Bank of England is expected to take a cautious approach to ensure that the current energy price spike does not lead to broader, more permanent inflation. This shift in expectations has caused concern in the housing and business sectors, where many had hoped for a reduction in borrowing costs.
As the conflict in the Middle East continues, the UK government’s options remain limited by its fiscal rules. With significantly less financial cushion than during the 2022 energy crisis, the administration is focusing on diplomatic solutions to the overseas war. The goal is to see a reduction in global energy prices that would allow the UK’s domestic inflation to return to its target level.