Experts warn: “energy driven inflation is unambiguously bad for everyone in the UK” amid fears of new cost of living spike
Energy bills could surge by an average £500 a year if the Middle East crisis continues, a think tank has warned.
Wholesale energy prices have already rocketed by 50% in the wake of the deepening conflict. The sharp rise in the “spot” price has been driven by concerns about a hit to supplies of oil and liquefied natural has from the Gulf.
The Resolution Foundation said: “The escalating conflict in the Middle East has now triggered a sharp rise in oil and gas prices which could cause living costs to start rising more quickly again.
“If sustained, these rises could add over £500 to the typical household energy bill in the summer and roughly a percentage point to inflation – bringing another unwelcome cost of living shock to families.”
It is the last thing many households need given the ongoing cost of living squeeze, and with energy bills finally set to fall.
Regulator Ofgem only recently announced that its price cap will drop £117 to £1,641 a year from April for the average household using both electricity and gas and paying by direct debit.
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The biggest reason for the fall is Chancellor Rachel Reeves’ £150 cut to bills announced in the last Budget.
A sharp rise in wholesale energy costs – which make up the biggest single chunk of a typical bill – could see the price cap rise when Ofgem next updates it in July.
Analyst Chris Wheaton has warned that if wholesale gas prices reach 250p per therm and remain there then Ofgem’s average price cap could surge to £2,500 a therm. Wholesale prices in the UK rose to more than 140p a therm on Tuesday on the back of ongoing uncertainty.
Professor David Miles, from the Office for Budget Responsibility, warned of the “very substantial” increase in oil and wholesale gas prices in the wake of the escalating conflict.
The question, he stressed, was whether the spike would be short term if these higher prices remained. But he warned: “Energy driven inflation is unambiguously bad for everyone in the UK,”adding that it could add as much as 1% to the rate of inflation.
Prof Miles went on: “What will happen to inflation is particularly uncertain in the light of what has happened in the past few days.”
The OBR’s forecast had been for inflation to return to the Bank of England’s 2% target this year, but Prof Miles added: “There must be more uncertainty about that now.”
Reshima Sharma, deputy head of politics at Greenpeace UK, said: “The Chancellor is under pressure to keep energy prices affordable and took a step towards this in last year’s budget by moving some system costs out of bills.
“But with conflict spiralling in the Middle East, it’s likely consumers will face soaring energy bills because we allow the price of gas to set the price of electricity most of the time.
“With wholesale gas prices now at a three-year high, British households and businesses remain at the mercy of volatile fossil fuel markets.
“It’s vital the Government heeds our warnings and decouples the cost of electricity from gas. If the Chancellor is serious about delivering growth and stability, that commitment must be matched by rapid investment in solar and wind energy, alongside urgent upgrades to the UK’s grid infrastructure.”
Simon Francis, coordinator of the End Fuel Poverty Coalition, said: “Global price shocks translate into higher energy costs because the UK remains so heavily dependent on gas and the mature North Sea basin will be unable to meet domestic demand within the next few years.
“Our energy system also links the cost of gas to electricity prices because the grid still relies on gas-fired power stations, although this influence eased last year. The conflict has already started to push wholesale gas prices to levels we’ve not seen since 2023, but for now most households are shielded by the Ofgem price cap.
“Bills are effectively protected until at least July 1 2026 because the April to June cap has already been set. “The cap works by smoothing out price spikes and delaying the passing on of cost increases to consumers. But that also means the real risk is what happens next.
“If wholesale prices fall back, the impact may be limited. But if elevated prices persist, they will affect Ofgem’s next price cap decision in May, which takes effect from July. It is also unclear how suppliers will respond in the fixed tariff market. In periods of uncertainty they often withdraw or increase the price of deals to avoid exposure to volatile wholesale costs.
“Households that rely on heating oil are even more exposed, and the latest surge in those prices will be a major concern for rural and off-grid families needing to refill in the coming weeks.”
