UK inflation could end the year higher than previously expected at 3% because of the US-Israel war in Iran, the government’s economics watchdog has warned.
David Miles, a senior figure at the Office for Budget Responsibility (OBR), said inflation could end the year close to 3% – a percentage point higher than expected before the war – because of the energy price shock triggered by the crisis in the Middle East. The UK’s official inflation target is 2%.
Oil prices fell on Tuesday after rising above $100 (£75) a barrel on Sunday, but remain significantly above the level before the US and Israel began bombing Iran just under a fortnight ago. A barrel of Brent crude was trading at $89 on Tuesday afternoon.
Miles told the Commons Treasury committee that if current energy prices were sustained, the UK would face a “material, significant” increase in inflation, delivering a “noticeable” and “unwelcome” increase in living costs for British households.
On Tuesday the oil price was nearly a fifth higher than before the military action began, while gas prices are up by more than 50%.
“If there is no change in the picture on the prices from now on, forward, we estimate something like 1% higher consumer prices by the end of the year.
“That’s orders of magnitude as of right now. I’d have given you a different answer probably yesterday morning, and by the end of this week, it could look different again. It’s not clear which way we go from here.”
His comments come after Rachel Reeves warned Britain to prepare for rising inflationary pressures as the fallout from the war in the Middle East begins to feed through to domestic energy prices.
The chancellor has made the cost of living a top priority for Labour this year, including measures to cut energy bills. However, economists say the likelihood of a drawn-out US-Israeli war with Iran could drive up energy prices and stoke inflationary pressures in Britain and around the world.
Headline inflation in the UK is currently running at 3%, down from a peak of 3.8% last year, and had been expected to drop close to 2% this year with the help of the chancellor’s energy measures.
The prospect of higher UK inflation means the City is no longer expecting the Bank of England to cut interest rates at its policy meeting next week.
