The average household will be £480 worse off this year due to increased energy costs from the US-Iran war, stark new research has warned.
A modest boost to living standards that was forecast to take place across the year will be entirely reversed for the average household, the influential Resolution Foundation think tank has found, despite the recently announced ceasefire.
Median incomes were set to grow by 0.9 per cent this year according to the group’s pre-conflict forecasts, but are now instead set to fall by 0.6 per cent.
For lower-income households, growth of 2.8 per cent has been downgraded to 1.2 per cent.
The United States and Iran agreed to the eleventh-hour ceasefire earlier last week, announcing a deal less than two hours before president Donald Trump’s deadline for Tehran to reopen the Strait of Hormuz.
The effective closure of the waterway over the past month triggered a massive spike in the price of oil and natural gas, immediately hitting fuel costs and threatening to raise energy bills in the summer.
The energy price cap will remain at £1,641 until the end of June, when experts warn it could rise dramatically. A forecast from the respected Cornwall Insight earlier this month, made before the ceasefire was announced, found it could rise by as much as £288 for the average household.
The Resolution Foundation’s researchers acknowledged that the future course of the conflict remains “highly uncertain”, but added that the increased cost of energy bills and fuel prices will “almost certainly be passed on to households”.
Sir Keir Starmer has pledged to tackle the rising cost of living, telling households at the start of the month that, while the conflict will “affect the future of our country”, the UK is “well-placed to weather it”.
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The prime minister sought to reassure Britons that there is a “long-term plan” in place, which includes pushing for de-escalation in the Middle East and for the Strait of Hormuz to be reopened.
James Smith, chief economist at the Resolution Foundation, said: “Despite hopes for a sustained peace, the path of this conflict remains uncertain and energy prices remain well above pre-war levels, meaning many households face a decline in their purchasing power this year.
“This squeeze will run right through the income distribution. Lower-income households will still see some income growth thanks to a long-awaited rise in real benefit levels, but inflation will likely knock more than a percentage point off what they stood to gain. For those in the middle and towards the top of the income distribution, even the thin growth they had been expecting has tipped into negative territory.
The think tank has urged the government to consider a social tariff for energy bills, which would provide discounted prices for lower-income families.
Mr Smith added: “De-escalation is certainly welcome, but damage to household finances this year is to a large degree already done. The government should act now to prepare a social tariff that reaches households falling through the cracks this winter.”
Speaking at the start of April, chancellor Rachel Reeves indicated any support with energy costs would be based on household income, but added it was “too early” to say exactly how this would work.
Graeme Downie, a Labour MP who sits on the energy select committee, told The Independent on Thursday that “it will still take a long time for prices to return to normal” and the full impact of the crisis on the cost of living could be felt “until 2027-2028 at least”.
A Treasury spokesperson said: “We know consumers are paying more because of the war in the Middle East. This is not our war and that is why we did not join it. The priority is a peace deal and supporting families through this crisis.
“We are already taking £150 off energy bills, extending the 5p fuel duty cut, supporting households using heating oil, boosting pay for millions, and freezing rail fares and prescription charges.
“The chancellor has been clear – contingency planning is taking place for every eventuality, so that we can keep costs down for everyone and provide support for those who need it most.”
