UK price and supply chain disruption from Middle-East conflict expected as tensions rise

The escalating conflict between Israel and Iran poses numerous economic challenges for Britain. The most pressing issue is the impact of the geopolitical uncertainty on global oil prices, and its implications for consumer prices.

Since the headlines of Israel’s initial attack hit the newswires, global Brent Crude oil futures have spiked by around 7%, or $5 a barrel, which is roughly the equivalent to a 0.2 p.p. increase in UK inflation. Higher inflation would not only squeeze household disposable incomes, but could also delay Bank of England interest rate cuts, which would have additional negative consequences for growth.

Thus far, the move in oil prices has been relatively contained, but that would change quickly should Israel begin targeting Iran’s oil production or follow through with threats to block the Strait of Hormuz.

The latter would raise fresh fears about the possibility of supply-chain bottlenecks, which may increase UK import costs and further push up domestic consumer prices. This would put Labour in a very tight spot, as higher inflation and weaker growth would both erode the government's fiscal headroom and raise the risk of fresh tax hikes in the autumn.