Oil shock returns: Middle East war pushes up petrol, energy bills and inflation

Just as Britain appeared to be emerging from years of painful price rises, an external shock has dragged the cost-of-living crisis back to the top of the agenda. A conflict in the Middle East has disrupted the flow of oil and gas and sent crude prices sharply higher, with the effects already showing up at petrol stations and threatening to push household energy bills up again from July.

At the peak of the disruption, a barrel of crude was trading some $42 higher than it had been the day before the conflict began, a jump of around 57%. Average weekly petrol prices have already risen about 20% above their pre-war levels, and the next adjustment to the household energy price cap is expected to follow suit.

This is general information about the economy rather than financial advice, but for millions of households the renewed squeeze is all too tangible, hitting budgets that had only just begun to recover.

From the pump to the price cap

Higher oil prices feed through to the economy along several channels, and petrol is the most immediate. Drivers have felt the change within weeks, with forecourt prices climbing roughly a fifth above where they sat before the conflict. Because transport costs filter into the price of almost everything that moves by road, the effect rarely stays confined to the pump for long.

Energy bills are the second front. The impact of the recent increases is not expected to feed through to domestic energy prices until the next price-cap change in July, with forecasts pointing to a typical household cap of around £1,973, roughly 20% above its April level. For households still carrying debt from the last energy crisis, another step up in bills is the last thing they need heading into the second half of the year.

“An energy shock is the most regressive kind of inflation. It hits everyone, but it hits lower-income households hardest because they spend a bigger share of their budget on fuel and heating.”

— An economist specialising in household finances

The inflation rethink

Before the conflict, the inflation rate had been expected to fall from around 3.0% at the start of 2026 towards the Bank of England's 2% target from the spring onwards. That benign forecast has been torn up. Inflation, which had eased to 2.8% in April, is now expected to climb back towards 3.5% by the end of the year as the energy effects work their way through the system.

The Bank has warned that the indirect effects of higher oil prices alone could add roughly a third of a percentage point to inflation in the third quarter. That has all but extinguished hopes of interest-rate cuts in the near term and even raised the prospect, once unthinkable this year, of further rises. The Chancellor has acknowledged the inflationary risk the conflict poses to the public finances and to household budgets alike.

• Crude prices spiked by as much as $42 a barrel, around 57%, at the height of the disruption.
• Average weekly petrol prices have risen roughly 20% above pre-war levels.
• The July energy price cap is forecast at around £1,973, about 20% above its April level.
• Inflation, 2.8% in April, is expected to climb towards 3.5% by the end of 2026.
• Higher oil prices could add about a third of a percentage point to inflation in the third quarter.
• Hopes of interest-rate cuts have faded, with some economists now flagging the risk of rises.

Background

Britain imports a large share of its energy, which leaves the economy exposed to swings in global oil and gas markets in a way that domestic policy can do little to counter. The energy crisis that followed Russia's invasion of Ukraine in 2022 drove inflation into double digits and triggered an unprecedented cost-of-living crisis, the memory of which still shapes the public mood.

The energy price cap, set by the regulator Ofgem, limits the rate suppliers can charge per unit of gas and electricity for a typical household and is reviewed several times a year. It does not cap a household's total bill, but it has become the headline measure by which families judge the affordability of their energy, making each adjustment a closely watched political event.

What it means

How long the squeeze lasts depends almost entirely on the course of the conflict and the path of oil prices, both of which are beyond the control of British policymakers. If tensions ease and crude retreats, the inflationary bump could prove temporary; if the disruption drags on, the country faces a longer period of higher prices, squeezed budgets and a central bank with little room to help. Either way, the comfortable assumption that the cost-of-living crisis was over has been quietly abandoned.