The outlook for the economy and your finances if US-Iran war persists

Inflation figures covering the first month of the US-Iran war have fired a warning shot across the bows over what may lie ahead for the UK economy.

The data from the Office for National Statistics (ONS) showed a rise in the main consumer prices index measure from 3% in February to 3.3% last month.

The rolling annual figure was mostly driven higher by rising fuel prices.

Economists agree that the longer the conflict in the Middle East persists, the more extensive and harmful the impact will be.

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Recent forecasts, by the likes of the International Monetary Fund, OECD and Item Club, have largely assumed that the disruption to oil and gas flows from the Gulf is short-lived.

But what if it isn't? Here, Sky News examines how a growing number of forecasters and other bodies currently see things looking towards the end of the year and beyond, assuming the Strait of Hormuz remains closed to shipping.

Big picture

The good news is that the energy price shock seen to date is far below that witnessed shortly after Russia's invasion of Ukraine.

That said, a five-year squeeze on household finances from successive economic headwinds has taken its toll, leaving millions of families less able to defend themselves from rising prices.

Inflation

We saw a post Russia-Ukraine war inflation peak above 11% in the UK.

Recent research by Capital Economics has been the most comprehensive in estimating the likely effects of an extended war, warning that the headline could top 7% by the year's end under an "adverse scenario".

We'll get to some of the individual components within that forecast in a moment, but that figure would represent the highest level since the 6.8% level seen in July 2023.

While driven by road fuel prices and elevated energy bills, the report also saw contributions from airfares and food as elevated energy costs are passed down supply chains to consumers more widely.

Household energy bills

The energy price cap acts to shield families from increases in wholesale costs until the beginning of July.

Capital Economics estimated that energy price inflation would peak at 18.1% in July under its baseline scenario.

That is not to say bills will not rise further heading towards, and into, winter.

Upwards pressure will depend on the promise of targeted support from the government and its policy cost choices, the availability of alternative gas supplies, European gas storage levels and the weather.

Airfares

Under its adverse scenario, Capital Economics saw the cost of plane tickets rising by an average 50% by the end of 2026, though it said it was "plausible" that the level would be around 26%.

That is still way up on a pre-war level just below 4% and reflects the likely path for jet fuel costs, already more than double pre-war rates.

Food

We've been used to rising food bills for many years.

The same report saw food inflation rising to 6% in June next year from a pre-war level of 3.3%.

It is worth noting that the prediction covers the higher cost of producing food, mostly from raised energy and fertiliser bills, and does not cover wider grocery essentials.

The public finances

The Resolution Foundation has released a "severe but plausible scenario" in which a drawn-out war in the Middle East delivers a £16bn hit from a weaker economy, delivering a severe blow to the chancellor's so-called fiscal headroom.

Those rules say everyday spending must be met by tax revenues by 2029/30.

The thinktank said its findings served as a warning that Rachel Reeves's planned support for household energy bills should be targeted and temporary, to reduce the risk of raising borrowing towards the end of the parliament.

(c) Sky News 2026: The outlook for the economy and your finances if US-Iran war persists