Why Middle East crisis could lead to UK cost of living rising

The British Chambers of Commerce has warned that inflation will be higher than expected throughout 2026 due to the conflict, with chancellor Rachel Reeves echoing the concern.

She told the Commons on Monday: “I am clear eyed about my response to the current situation.

“My economic approach will both be responsive to a changing world and responsible in the national interest.”

Ms Reeves spoke following a meeting with G7 members and after Sir Keir that Brits would be “right to worry” about bills after oil prices topped $110 per barrel.

She added: "The economic impact of the situation in the Middle East will depend, of course, on its severity and its duration. The movements that we have already seen are likely to put upward pressure on inflation in the coming months.”

What is inflation?

Inflation is when prices rise and how quickly they do so is called the rate of inflation, the Bank of England states in its official definition.

The government aims for a slow and steady rate of inflation to keep the economy on track and has an annual target rate of 2% with the Bank of England charged with keeping it at that rate.

The main way that the bank keeps tabs on inflation is through interest rates, which is controlled through setting its base rate and, in more extreme cases, by propping up the system with quantitative easing and by offering government bonds.

The bank states: “It is low enough to keep price rises small but high enough to avoid the problem of deflation – which is when overall prices fall, and businesses make less money and begin to cut costs by reducing wages and staff.”

Violently rising inflation can devalue money and lead to problems as well as savings becoming worthless and eventual economic collapse.

How is inflation measured?

The Office for National Statistics (ONS) checks the prices of about 700 items in a virtual ‘basket’ of goods and services on a monthly basis.

This could be a loaf of bread, a package holiday, a television screen, and a water bottle.

What goes in this basket changes from time to time as it is designed to mimic what is bought by typical British consumers. The overall price is known as the Consumer Price Index.

The country will next get a look at its rate of inflation when the ONS releases its update on March 25.

Why is the UK economy affected by the Iran war and Middle East conflict?

Elevated inflation is linked to higher oil and gas prices due to the conflict in the Middle East, which is expected to push up energy prices in the near term.

Both Sir Keir and Ms Reeves have acknowledged that the war is likely to cause economic damage in the UK, with the Chancellor telling MPs it was “likely to put upward pressure on inflation” over the coming months.

“People are rightly worrying about what this means for life at home – their bills, their jobs, their communities,” Sir Keir said on Monday.

“I will always be guided by what is best for the British public and no matter the headwinds, supporting working people and their families with the cost of living is always top of my mind.”

How much could inflation rise by?

The British Chambers of Commerce forecast that inflation would remain “firmly above” the Bank of England’s 2% target, noting the “highly uncertain” global situation.

The chambers of commerce has said that inflation will be at 2.7% by the end of the year, having previously predicted it would have slowed to 2.1%.

The projections indicated that energy prices are then assumed to start easing back, allowing for overall inflation to drop back to the Bank of England’s target of 2% next year.

It said inflation is likely to drop to 1.9% by late next year as energy prices drop and wage growth moderates.