The UK economy is bearing the brunt of the US-Iran conflict, with soaring energy prices threatening growth, lifting inflation, and placing living standards under severe pressure according to official forecasts.
Rising energy prices are driving up inflation across supply chains, pushing petrol to nearly £1.73 per litre and diesel close to £1.99. The OBR projects that inflation will peak at 3.8% in 2027, staying higher for longer than previously anticipated and ultimately weighing on household disposable income next year. Officials described the outlook for individual living standards as grim following a prolonged period of stagnant growth since the Covid pandemic.
Consequently, the Bank of England is widely expected to raise interest rates from their current 3.75% level, with forecasts suggesting they could climb as high as 4.5%. Higher interest rates will increase borrowing costs for consumers and drive up government debt repayments, leading to higher annual state borrowing alongside increased welfare and pension spending.
The OBR emphasized that significant uncertainty remains regarding these projections due to the unpredictable trajectory of the Middle East conflict.
