Britain is likely to be hit by rising inflation because of the US war with Iran, the chancellor has said, as she suggested a “rapid de-escalation” would be the best protection against a jump in energy prices.
Rachel Reeves stopped short of setting out any new relief for people who could be hit by rising prices, rebuffing calls to ditch a planned 5p rise in fuel duty in September.
The Conservatives plan to force a Commons vote on Tuesday over the rise, but Reeves said the competition watchdog had been ordered to keep a close eye on fuel pump prices and domestic heating oil costs to prevent wartime profiteering.
Both the chancellor and the prime minister, Keir Starmer, suggested the government could be prepared to intervene to protect UK households against major cost-of-living shocks to come at the next energy price cap, as oil prices surged past $100 (£75) a barrel for the first time since 2022.
Late on Monday night, however, the price for Brent crude, the international benchmark, fell back to below $90 (£70) from a high earlier in the day of $119.50 (£89). The fall came after Donald Trump indicated to politicians during a speech in Florida that the conflict might end soon.
Starmer said a long-term war would affect the “lives and households of everybody” but said the government would seek to “get ahead” if the conflict was prolonged.
US and Israeli warplanes launched new waves of strikes on targets across Iran on Monday, with crowds gathering in Tehran in support of Mojtaba Khamenei, the country’s newly appointed supreme leader.
The warning from the chancellor came as:
The price of Brent crude oil rocketed to as high as $119.50 on Sunday, a jump of 29%.
The Bank of England is now expected to keep interest rates on hold through 2026, with a small possibility of a rise in 2027.
The prospect of a prolonged conflict and higher inflation also pushed global markets lower.
The AA said drivers could “consider cutting out some non-essential journeys and changing their driving style to conserve fuel”.
Most UK households will be protected in the short term by the energy price cap, but the UK’s reliance on gas from the Middle East makes it especially vulnerable to what amounts to a blockade of the strait of Hormuz, through which about 20% of the world’s liquid natural gas is transported.
Iran’s security chief, Ali Larijani, said in a post on X on Monday that safe passage would not be restored “amid the fires ignited by the United States and Israel in the region”.
Analysts have said Iran is hoping that restricting the flow of oil to global markets and attacking energy infrastructure in the region will threaten sufficient damage to the global economy to force Trump to end the US offensive, and bring an end to the war on Tehran’s terms.
UK ministers are understood to be looking at ways to potentially mitigate the effects of rising costs on energy bills. Speaking in parliament on Monday, the chancellor said the economic impact of the situation in the Middle East “will depend of course on its severity and its duration” but said the movements seen already were “likely to put upward pressure on inflation in the coming months”.
Reeves, who spoke to G7 finance ministers earlier on Monday, said the Treasury was ready to support a coordinated release of collective International Energy Agency oil reserves.
Pressure is growing on the chancellor to go further. The Trades Union Congress said “working people are now facing a Donald Trump-made cost of living crisis” and said the government “must stand ready to pull out all the stops and shield households and firms from this global shock”.
More than 40 Labour MPs in rural seats have said in a new report that people reliant on heating oil face being plunged into poverty. About 1.5m UK homes are off the gas grid and are not protected by Ofgem’s energy price cap.
The report by the Labour Rural Research Group found that in recent days, some rural households had reported heating oil price increases of up to 117%.
“In a matter of days since the war began with Iran, we’ve seen off-grid oil prices surge by more than 100%, leaving thousands of UK rural households extremely vulnerable to off-grid energy price fluctuations,” the Suffolk Coastal MP Jenny Riddell-Carpenter said.
“Many thousands of families are now fearful that it will be impossible to buy oil to heat their home, and they are now longing for a mild spring. This volatility exposes rural Britain to greater challenges, and pushes more families into rural poverty. We urgently need a rural strategy that includes an energy price cap for off-grid homes.”
Reeves said discussions would be held on help for people reliant on heating oil and that petrol forecourt bosses had also been called into the Treasury and warned about price gouging.
“Let me be absolutely clear: I will not tolerate any company exploiting the current crisis to make excess profits at consumers’ expense,” she said.
MPs have begun to privately raise the alarm with the Treasury on how the government is communicating the crisis – saying they believe Starmer and Reeves should be making it more explicit who is to blame for the unfolding crisis and the potential hit to the cost of living, as well as saying that the government will help with measures to ease the problem.
YouGov polling on Monday found 74% of the public already expect the conflict to have a negative impact on their household’s finances – including 35% who expect it to have a “very” negative impact.
Reeves told MPs the conflict “affects us all, and we must respond to it” but said she was “clear-eyed” about her response, and that the government had already taken steps to shield the economy from global shocks.
“Our energy system is now more secure than it was at the outset of the Russia-Ukraine conflict,” she said, saying the UK was “less reliant on and less exposed to volatile international energy prices than we were at the outset of the Russia-Ukraine conflict, and that is welcome”.
But Reeves defended her decision to increase fuel duty, which will rise in stages from September this year, the first fuel duty increase in 15 years.
The chancellor said drivers would still pay less because of the freeze until September but the Conservatives have tabled a motion in parliament seeking to block the rise and force Labour MPs to publicly back or oppose the measure.
