A ceasefire may have been declared in the Middle East but the damage has already been done to oil prices, supply chains and even farming overheads. More prrice hikes are expected across the board after petrol hit a shocking 160p a litre at the pumps.
The good news is the price of benchmark crude oil has fallen by about 13% to $94.80 (£70.73) a barrel, while US-traded oil was more than 15% lower at $95.75. However, before the war a barrel would set you back £70 – significantly cheaper than it is now.
This means many goods will become more expensive to make, with some producers already flagging increased prices. It comes after Donald Trump announced a last minute ceasefire deal with Iran that will see the Strait of Hormuz reopening.
Fuel prices
Petrol – and especially diesel – was where UK households saw the impact of the crisis most, leading to warning about “price gouging” – with little lag between the cost of oil surging and motorists feeling pain at the pump. Pressure will rightly be on forecourts to pass on the sharp fall in oil prices – down below $95 a barrel – in the wake of the ceasefire deal.
According to the RAC, the nationwide average for unleaded now stands at 157.71p a litre, and 190.62p for diesel. Before the war began, unleaded was 132.83p and diesel 142.38p. Both fuels are now at their most expensive since late 2022.
Nigel Green, chief executive of financial advisory deVere Group, predicted fuel prices could fall in the coming days. “Drivers will feel some short-term relief as petrol and diesel prices edge lower,” he forecast.
But RAC head of policy Simon Williams urged caution: “The conditional ceasefire announcement may have taken some heat out of global oil prices, but the outlook for drivers in the UK remains highly uncertain.
“The best hope in the short term is that pump prices stop rising at the rate they have been and hopefully top out in the coming days. Much will depend on the stability of the ceasefire, whether oil shipments can move freely through the Strait of Hormuz, and the longer‑term impact on oil production across the Gulf. As it is a sustained lower oil price – over several weeks, not just a few days – that is required to bring wholesale fuel costs down meaningfully.
“Drivers should not expect significantly cheaper fuel in the short term, although some smaller independent forecourts buying on a ‘spot’ basis may be quicker to pass on any reductions.”
Energy bills
Wholesale gas prices have soared since the start of the Middle East conflict. Following the ceasefire announcement, the price has fallen back but remains high.
Unless those costs slump, household gas and electricity prices are still very likely to rise in July. That is because Ofgem – which sets a price cap for tens of millions of households – uses a window for deciding suppliers’ costs, so some of the surge in what they pay to buy supplies is already baked in.
Industry experts Cornwall Insight last week predicted the price cap would jump by £288 to £1,929 a year in the summer.
Expect that forecast to fall if the ceasefire holds. While no-one wants bills to rise in July, it is Ofgem’s price cap in October that matters far more, coming ahead of winter.
PlayStation, tea and tinned tuna
Last week, Sony hiked the price of a PlayStation 5 by £90 as the tech giant cited “continued pressures in the global economic landscape”. The increase means the price jumped by 19% from just a week ago as they also hiked the cost of the PS5 Digital Edition, the PS5 Pro and the handheld PlayStation Portal.
The cost of microchips has risen massively thanks to disruptions associated with the Iran war and Artificial Intelligence (AI) firms buying up massive amounts of computing hardware.
British staples like baked beans and tinned tuna are also expected to take a bigger chunk our of wallets due to increased production and logistical costs. Princes tuna and Branston baked beans have warned customers they will increase their prices by 5%.
Most Brits depend on a brew or coffee to keep them going through the day. Sadly, this sacred ritual is not protected from price hikes as both are set to rise.
The Iran war has severely impacted fertiliser production – which is vital to coffee and tea farmers – and transportation fees. Sippers up and down the country can expect prices to rise.
Interest rates
The jump in energy costs after the war erupted forced economists to rip-up their forecasts. Inflation had been predicted to continue easing, but the fall-out from the conflict is expected to push living costs back up again.
That is likely to be the case, even if the ceasefire holds and there is a permanent deal done between the US and Israel and Iran. However, the cooling of tensions – and the hope that oil prices will fall – could prompt the Bank of England to think twice about having to consider hiking interest rates, as had seemed likely until now.
Neil Shearing, from Capital Economics, still expects UK inflation to rise from the current 3% to around 4.5%. But he added: “The rate hikes currently priced into markets may prove excessive.”
That would be welcome news for hundreds of thousands of borrowers looking to take out a new mortgage, or having to remortgage, over the coming months.
However, home loan loans are unlikely to fall sharply, and have spiked since the start of the conflict, adding hundreds of pounds in an annual repayments for a typical borrower.
The average two-year fixed residential mortgage rate now stands at 5.90%, and 5.78% for a typical five year such deal. The cost of these loans has been pushed up by higher swap rates – or how much banks charge each other for lending.
Adam French, head of consumer finance at industry experts Moneyfacts, said: “Markets have reacted to easing tensions by pushing down expectations for future interest rate rises. Because swap rates reflect these expectations, they have started to fall too, reversing some of the sharp increases seen since the conflict began.
“It should take the immediate upward pressure off mortgage rates. However, rates are likely to remain higher for some time yet.”