How the Iran war may affect your bills and finances

From petrol prices to mortgage rates, the US-Israeli war with Iran has already had an impact on people's finances in the UK.

How deep and sustained that turns out to be depends on the duration of the conflict and how quickly supply lines and economies can recover.

Here are some of the areas to watch out for.

Fuel prices for motorists

Drivers may have already noticed that prices at the pump are on the rise.

By Sunday, average petrol prices had ticked up by 4.68p to 137.51p a litre, while diesel had increased by 8.59p to 150.97p, the RAC motoring organisation said.

According to analysts, every $10 increase in oil pushes up pump prices by roughly 7p a litre.

With crude having jumped more than $30 since the start of the war, average petrol prices of more than 140p a litre look inevitable, while 150p per litre could soon be breached if oil doesn't fall back.

While motoring organisations say that there are plenty of supplies, they are encouraging people to reduce non-essential journeys. They also suggest people amend their driving style, by not accelerating or braking too hard to conserve fuel.

Not everyone has a car or may not use one for a daily commute. However, when petrol rises, it can carry through to higher prices for goods and services.

For example, if transport costs for supermarkets increase that could then be reflected in the cost of food.

Cost and choice of mortgages

Now, the opposite is happening.

Some of the UK's biggest lenders have raised rates, owing to their own funding costs rising and an expectation that the base borrowing rate will not fall as previously anticipated.

Mortgage rate rises for homeowners getting a new two or five-year deal, or renewing one, have gone up but not shot up, so far.

However, there is talk of "painful" rises to come for borrowers, particularly those shopping for shorter-term deals.

The average rate on a two-year deal has risen to 4.87%, and the average five-year fix is up to 4.98%, as of 9 March, according to the financial information service Moneyfacts.

The last time both were above 5% was in August last year.

At times of economic uncertainty, lenders may pull mortgage products off the shelves, reducing choice.

A couple of lenders have already withdrawn their entire range, with the expectation of repricing them at a higher level.

"When lenders take the step of pulling deals rather than simply tweaking pricing, it often indicates that funding costs have moved too quickly for incremental changes to keep pace," said Adam French, head of consumer finance at Moneyfacts.

Energy bills and heating oil costs

There is some protection in place for household gas and electricity bills, owing to the price cap in England, Wales and Scotland set by energy regulator Ofgem.

However, it is time-limited and does not cover everyone.

The price for each unit of energy, for those on variable deals governed by the cap, is set until July.

In fact, prices are going down in April.

However, what happens now and until late May on the wholesale energy market will determine these household bills from the summer. A sustained period of high wholesale costs could mean a sharp increase in energy prices for millions of people.

The last time there was a particular spike, following Covid and Russia's invasion of Ukraine, the government had to step in to help with the Energy Price Guarantee.

Those looking to fix their energy unit price instead are facing a similar situation as people searching for a mortgage.

The most immediate impact of rising prices is felt by those who use heating oil, often stored in a tank outside their property. There is no cap that limits the cost.

Campaigners say prices have more than doubled since the conflict began, and orders have been limited as panic buying adds pressure on the sector.

"We may be heading into spring, but anyone running low on oil right now doesn't have the luxury of waiting for prices to fall," said Emma Simpson, chief executive of Rural Action Derbyshire.

Higher cost of living but with limits

Just at the start of March, UK inflation - which charts the rising cost of living - was forecast to be at or around the Bank of England's target level of 2% over the next five years, according to the Office for Budget Responsibility (OBR).

The government's official forecaster said the price of a typical basket of goods would be going up at 2.3% this year and then 2% a year from 2027. But, it did those sums before the air strikes on Iran began.

Analysts believe this is increasingly unlikely.

Making an inflation estimate becomes very difficult, given the volatile situation militarily and economically.

Yet, analysts do not think inflation will return to the peak of 11.1% seen in the UK in October 2022. That is because the war in Ukraine also caused spikes in the prices of basic foodstuffs, such as wheat and edible oil, owing to the role of Ukraine in producing those items. That is not the case now.

Interest rates less likely to fall

The Bank of England is charged with getting inflation to as close as 2% as possible, and its primary tool to do so is interest rates.

After the rate-setting committee met in February, the Bank's governor Andrew Bailey said there was scope for further rate cuts this year.

That is now much more in doubt. Analysts who had widely expected borrowing costs to be trimmed in March have now ruled out that possibility.

But while borrowing money could become more expensive than previously thought, savings could be slightly more lucrative.

In times of uncertainty, people have previously hoarded savings. The spending power of that money may reduce, if the cost of living rises, and it may hit general economic growth in the UK.

Wider implications for our finances are highly dependent on how the war - and its global impact - plays out.

But, the choice of holiday destinations in the spring and summer may be more limited. Flights could get more expensive.

Jet fuel has gone up sharply in price. Although airlines have buying strategies that limit some of this impact, the longer aviation fuel remains expensive the harder it is not to pass this on through higher fares.