The breakdown of the US-Iran peace talks threatens further economic pain for Britons with higher oil prices and risk of shortages, the Government has been warned.
Keir Starmer and Rachel Reeves’ economic headache looks set to intensify after experts warned of inflationary pressures that could eventually hit interest rates.
In a phenomenon some have labelled “Trumpflation – the premise that the actions of US President on the world’s stage is leading to instability and rising living costs in the UK – economists said the crisis could add 1 to 2 percentage points to inflation.
They also suggested the Government could consider releasing oil reserves and rationing household allocations of fuel.
After talks broke down, Trump said the US would “immediately” begin blockading the crucial Strait of Hormuz waterway, which Iran has been controlling, and suggested he would do so with other – unnamed – countries.
But it is understood the UK Government is not intending to take part in any blockade and instead is focused on pursuing “freedom of navigation” in the waterway.
PM urges calm
Foreign Secretary Yvette Cooper is due to convene another meeting of global allies in the coming days tasked with finding a diplomatic solution to opening the strait, a vital oil and gas shipping lane.
She will reiterate that there can be no place for tolls on an international waterway, it is understood, with discussions expected to focus on coordinated economic and political measures, such as sanctions against Iran.
The Prime Minister – who has said energy bills are going up “because of the actions of Putin or Trump” – urged the US and Iran to “find a way through” to peace and said the fragile ceasefire must hold, warning against any further escalation.
And Chancellor Rachel Reeves will travel to Washington for International Monetary Fund (IMF) meetings where she said she would be focusing on efforts to reopen the strait.
Writing in The Times, she said the Treasury was preparing contingency plans for worsening energy pressures and pledged to set out proposals for how to support British businesses.
A Treasury spokesperson said: “We know consumers and businesses are paying more because of the war in the Middle East. This is not our war and that is why we did not join it.”
Reeves hinted she would not resort to blanket financial support for households and businesses – arguing the country was still paying off the “enormous” cost of energy support announced under the Conservative government when the conflict between Russia and Ukraine sent prices spiralling.
Economists warn of inflation uptick
Willem Buiter, an economist and former member of the Bank of England’s Monetary Policy Committee, said the Government should consider releasing strategic oil reserves and rationing household allocations at prices below the market price.
He told The i Paper the breakdown of the peace talks will likely mean the Strait is closed to commercial shipping leading to “a significant further increase in oil prices”.
Brent Crude could reach $150 per barrel and rise to $200 if blockade lasts beyond June 2026, he said.
“Growing numbers of households and businesses will be unable to purchase oil products, including petrol and diesel fuel. If the Government has strategic oil reserves, this would be the time to release them, possibly rationing household allocations at prices below the market price,” Buiter suggested.
“Inflation could easily reach 7 per cent unless peace breaks out soon,” he said, adding that the rise in inflation was not just the fault of Trump but also Israeli PM Benjamin Netanyahu and what he said was the failure of Nato to pursue “a free and open Strait of Hormuz”.
The Liberal Democrats have been repeatedly warning about the notion of “Trumpflation”.
Thomas Pugh, an economist at RSM UK, said “high energy prices act like a tax on the UK, the higher prices go and the longer they stay there for the worse the impact will be.”
“At current levels the crisis will add 1 to 2 percentage points to inflation and knock 0.5 percentage points off growth,” he predicted.
Inflation is currently at 3 per cent, one point off the Bank of England target of 2 per cent.
Inflationary pressures could, in theory, prompt the Bank’s committee to increase interest rates at their next meeting in just over two weeks time – adding to financial pressures for borrowers and mortgage holders.
But Pugh said: “I suspect they will keep rates on hold as there is just too much uncertainty at the moment. But there is a good chance of a rate hike if energy prices are still high closer to the meeting or the MPC feels it needs to regain some credibility.”
‘Feeling the effects of Trump’s decision’
Dr Edward Jones, an economist at Bangor University, said that he would not want “to blame all of the UK’s inflation problems on one person” – referring to the claims of “Trumpflation” – but said “we are feeling the effects of his decision”.
“The UK being a net importer of energy – a domestic decision – means we’re exposed to such energy shocks, which will feed into our inflation,” he went on.
He added that the Bank of England, which decided to hold the interest rate at 3.75 per cent in March, may have to increase them if the view is that the conflict will continue for some time.
“Our expectations prior to the conflict was a gradual cut in rates. Much will depend on how long the conflict lasts for but we’re likely to see interest remain where they are for longer or even increase by 25bps (basis points) to 50bps.”
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