Don't be fooled by today's GDP figures. The real Iran shock is coming

After weeks of war and oil market turmoil, that looks like good news.

It isn't - not yet. The Iran conflict only began at the end of February, so today's figures cover one month of the shock. Higher oil and gas prices take time to feed through to inflation, reaching households when Ofgem resets the price cap next month. From there, bills could rise and the pressure spread through to the economy.

Without action, our IPPR modelling suggests inflation could peak between 3.6 and 5.8 per cent, with GDP growth falling as low as 0.3 per cent - well below the Office for Budget Responsibility's (OBR) 1.2 per cent forecast. The Treasury could lose up to £8 billion a year in higher debt payments and weaker tax revenue.

The government is leaving the tackling of this inflation to the Bank of England, which admits rate rises may be needed. But rates are the wrong instrument: they do nothing to affect international energy prices and bite only after a long lag. The government would be making households poorer twice: once through higher bills, and again through higher mortgages.

Britain is exposed to shocks like this because it relies on imported oil and gas. The only durable fix is accelerating the shift to renewables. But higher rates would make them harder to finance.

There is a better option. The Treasury should set a temporary £2,000 limit on the average household energy bill, kicking in only if Ofgem's price cap would push bills above that level. An immediate 10p fuel duty cut could reduce peak inflation by up to 2 percentage points.

Crucially, the cost of acting is limited. The upfront price is largely offset by what it avoids: lower borrowing costs, less tax revenue lost, and a smaller hit to growth. If acting prevents lasting damage, the Treasury could even save close to £10 billion a year.

The lesson of 2022 is not that universal support is reckless, but unfunded tax cuts and a sidelined OBR are. A targeted, time-limited intervention, costed by the OBR and coordinated with the Bank, would bring stability and certainty.

The government has not done enough. Going further is not the expensive choice - leaving the rest to interest rates is. Ministers should act.

____________________

William Ellis is a senior economist at IPPR and has held roles at HM Treasury and Oxford Economics.

LBC Opinion provides a platform for diverse opinions on current affairs and matters of public interest.

The views expressed are those of the authors and do not necessarily reflect the official LBC position.

To contact us email opinion@lbc.co.uk