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Conflict in the Middle East could trigger an energy price shock that wipes out anticipated growth in living standards in the UK worth £300 for a typical working-age household over the coming year, a leading thinktank has warned.
The Resolution Foundation said a “decent” one-off increase in average living standards this year and a bumper rise for lower-income households could be reversed by rising oil and gas prices as the Iran conflict disrupts supplies.
The UK’s reliance on gas from the Middle East makes it especially vulnerable to an effective blockade of the strait of Hormuz, through which about 20% of the world’s liquid natural gas is transported.
According to the thinktank’s calculations in its analysis of Tuesday’s spring forecast, living standards for typical working-age households are on track to grow by £300 over the next year.
Lower-income households are set for a larger rise in living standards of £800, up 3.9%, mainly because of the lifting of the two-child benefit cap and an above-inflation increase in universal credit. This would be the second strongest year for living standards in the past two decades for poorer households.
However, if the recent rise in energy prices persists, the foundation said all the gains could be wiped out.
While the effect might not be as large as the increase caused by the Russian invasion of Ukraine, which sent food, oil and gas prices soaring, a rise this year in oil and gas prices could add a percentage point to UK inflation and £500 on to typical annual energy bills, it said.
Ruth Curtice, the chief executive of the Resolution Foundation, said: “The immediate economic outlook for Britain is highly uncertain, with yesterday’s forecasts already looking out of date, while the living standards picture for the rest of the parliament is very lopsided.
“This coming year is set to be a decent one for living standards, and a bumper one for poorer families, as wages and benefit support rise above the level of inflation. But a fresh energy price shock risks puncturing this good news.”
The Joseph Rowntree Foundation said the situation could be even worse, arguing that predicted rises in average living standards by the government ignored pressures from housing costs.
“Our modelling finds that average annual household disposable incomes are projected to grow by only £40 over the course of the current parliament (from April 2024 to April 2029) after adjusting for inflation,” it said.
The charity said forecasts from the Office for Budget Responsibility, the Treasury’s independent forecaster, on key economic indicators such as the consumer prices index measure of inflation and average weekly earnings were fed into the Institute for Public Policy Research’s tax benefit model, which uses the family resources survey to project household incomes for each year until the end of the parliament.
The IPPR, a left-leaning thinktank, uses the Office for National Statistics’ family resources survey to achieve a more accurate picture of living standards, especially for those in the bottom half of the income scale.
