War, inflation and inequality: The latest crisis is reshaping ambition for low and middle-income Britain

The upsurge in inflation which followed the pandemic was supercharged by Russia’s invasion of Ukraine in 2022. It has only recently begun to subside, but its effects are still acutely felt.

The Iran War raises the prospect of a further substantial global inflation shock. Oil prices have spiked, reaching levels of $120 per barrel, and gas prices have reached a 4-year high point. The war is likely to have a persistent impact on inflation in the UK and other economies, as attacks have destroyed the production and processing capacity of the Gulf oil states as well as Iran. The Gulf accounts for around 20% of the world’s Liquefied Natural Gas (LNG) and 25-30% of our oil supplies.

But the Iran War does not just impact on our energy costs. The blockade of the Strait of Hormuz also affects other important commodities in our supply chains. About half of the world’s supply of urea and almost a third of ammonia pass through the Strait – both of these are key inputs to fertilizer production, and hence future food prices. The supply of crucial inputs to manufacturing like helium, sulphur, petrochemicals, aluminium etc are also disrupted.

We are beginning to hear from UK Government how it might address the impact of this new cost-of-living crisis on the most vulnerable in society. Last week a £53 million support package was announced to support the (approximately) 1.5 million UK households that rely on heating oil and who are not protected by the energy price cap. The UK’s emergency response committee (COBRA) is actively discussing the impact of the unfolding economic crisis.

The current crisis highlights the importance of a targetedapproach. In December the Joseph Rowntree Foundation regular tracker highlighted the extent of the problem for households in the bottom 40% of the UK’s income distribution. Many households in this group are skipping meals, going without heating, and borrowing for essentials.

Things were looking up a little before the Iran War. At the time of the Chancellor’s Spring Statement, the Resolution Foundation projected that in 2026-27 the growth in living standards for the poorer half of the wage distribution was due to be 3.9%. Much of this was driven by targeted policy changes, including a 6.2% increase in universal credit and the repeal of the two-child limit. But as the Foundation points out, the war puts all this progress at risk. Indeed, even before the impact of the war is factored in, low-income households were expected to experience lower living standards from 2027-28 onwards because of low projections of wage growth in the latter half of this parliament.

This illustrates a key point: the health of the overall economy (growing the economy and our productivity) really matters in addressing the cost-of-living crisis for those on lowest incomes. Direct policy intervention through increased benefits or one-off energy subsidies can help those on lower incomes temporarily (and it has to be targeted to low-income households rather than universal support as we have seen in previous shocks), but ultimately only economic growth and wage growth can make a lasting difference.

This latest war will impact more seriously on lower incomes: because a larger proportion of their spending is on essentials like energy costs and food, they will face a higher ‘effective inflation’ than those on higher incomes. A ‘social tariff’ for energy has been mooted but is still not here.

Also, typically, low to middle-income households face more constraints than higher-income households in the labour market. This is both in terms of their ability to increase their labour supply by working longer hours, and in terms of the limited resources (eg savings) to invest in their skills to grow their earnings. These constraints also apply to whole families through the impact on the children of low-income households.

This latest manifestation of the cost-of-living crisis will require not only short-term targeted policy action to address the issues facing the poorest households, but a determined long-term economic strategy focusing on growth: without sustained wage growth any policy interventions will have a short-lived impact.

None of this is politically easy: there are many reasons why the UK has experienced lower growth. But some of the levers at our disposal to boost growth in the short term (e.g. a closer trading relationship with the EU and a willingness to attract skilled labour through net migration) which would help the supply side of our economy continue to be constrained by our fractured politics.

One can only hope that this latest economic shock makes us willing to re-think these trade-offs.

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Professor Sir Anton Muscatelli is Distinguished Professor at the Adam Smith Business School, University of Glasgow.

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