Israel-Iran conflict poses new cost of living threat - here's why

The UK's cost of living crisis hangover is facing fresh pressure from the escalating Middle East conflict.

Whenever the region, particularly a major oil-producing country, is embroiled in some kind of unstable situation, the potential consequences are first seen in global oil prices. The Middle East accounts for a third of world output.

Money latest: Why Amazon is 'disappointed' Iran's share of the total is only about 3%, but it is the second-largest supplier of natural gas. Add to that its control of the key Strait of Hormuz shipping route, and you can understand why any military action involving Iran has huge implications for the global economy at a time when a US-inspired global trade war is already playing out.

What's happened to oil prices? Global oil prices have jumped as the Israel-Iran conflict has ramped up. News of Israel's first attacks 10 days ago sparked the biggest one-day leap seen since Russia invaded Ukraine in February 2022 - military action that led to the energy-driven cost-of-living crisis.

From lows of $64 a barrel for Brent crude, the international benchmark, earlier this month, the cost is currently 27% higher. Prices were as high as $81 a barrel in early trading in Asia on Monday but have since slipped back towards $77.

Iran ships almost all its oil to China because of Western sanctions, so the world's second-largest economy would have the most to lose in the event of any disruption to supply. Should that happen, China would need to replace that oil by buying elsewhere on the international market, threatening higher prices.

How are natural gas prices holding up? UK day-ahead prices are 24% up since the start of the month. Europe is more dependent on Middle East liquefied natural gas (LNG) these days because of sanctions against Russia.

The UK is particularly exposed due to the fact it has low storage capacity and relies so much on gas-fired power to keep the lights on and for heating. Israel-Iran latest: Israeli strikes target 'heart of Tehran' The day-ahead price, measured in pence per therm, is at 98p.

It had stood at 81p less than a fortnight ago. The higher sum was last seen over the winter - when demand is at its strongest.

What are the risks to these prices? Market experts say Brent crude would easily exceed $100 (£74) a barrel in the event of any Iranian action against supplies through the Strait of Hormuz - the 30-mile wide shipping lane controlled by both Iran and Oman. The Iranian parliament has reportedly approved a motion to effectively close the strait but such a move needs to be authorised by the leadership.

While Iran has a history of disrupting trade, analysts believe it will not want to risk its oil and gas income from China through any blockade. However, there is a chance that Iran's leadership could overlook that fact in any bid to damage the West in revenge for the US strikes on its nuclear facilities over the weekend.

What do these price increases mean for the UK? There are implications for the whole economy at a time when the chancellor can least afford it, as Rachel Reeves bets big on public sector-led growth for the economy. We can expect higher oil, gas and fuel costs to be passed on down supply chains - from the refinery and factory - to the end user, consumers.

It could affect anything from food to even fake tan. Increases at the pumps are usually the first to appear.

Prices are always quick to rise and slow to reflect easing wholesale costs. Data from the RAC motoring organisation on Monday showed that the average price of a litre of petrol had increased by 1.5p over the past week to 133.5p.

Diesel had risen by 2p to 140p. Energy bills will also take in the gas spike, particularly if the wholesale price rises are sustained.

The energy price cap from October - and new fixed-term price deals - will first reflect these increases. How does this all play out in the coming months? So much depends on events ahead.

But energy price rises are an inflation risk and a potential threat to future interest rate cuts. While LSEG data shows financial markets continuing to expect a further two interest rate cuts by the Bank of England this year, the rate-setting committee will be reluctant to cut if the pace of price growth is led higher than had been expected.

At a time when employers are grappling with higher taxes and minimum pay thresholds, and consumers face a surge in bills following the 'awful April' hikes to council tax, water and other essentials, a fresh energy-linked inflation spike is the last thing anyone needs..