UK inflation could end year higher due to Iran war, watchdog says

LONDON

UK inflation could end the year higher than previously expected at 3% due to the US-Israeli war in Iran, an official with the government’s economics watchdog said Tuesday.

David Miles, a senior figure at the Office for Budget Responsibility (OBR), said inflation could end the year a percentage point higher than expected before the war because of the energy price shock triggered by the crisis in the Middle East.

Iran, under US-Israeli attacks since Feb. 28, has fired rockets and missiles toward Israel and in the Gulf and has effectively closed the Strait of Hormuz in retaliation, disrupting oil markets.

The strategic waterway linking the Persian Gulf with the Arabian Sea normally handles about 20 million barrels of oil shipments daily and around 20% of global liquefied natural gas (LNG) trade, most of which is destined for Asian markets.

Oil prices fell Tuesday after rising above $100 a barrel Sunday but are still significantly higher than before the US and Israel began bombing Iran.

Brent crude was trading at $85 per barrel Tuesday evening.

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.

The price of oil Tuesday was nearly a fifth higher than before the military action began and 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,” Miles said.

“That’s (the) 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.”

The war-related disruption is forcing exporters to search for alternative shipping routes while also cutting off the region’s large exports of crop nutrients used in fertilizer production.

The supply shock, combined with rising energy and freight costs, is expected to increase pressure on global food supply chains and contribute to higher food prices worldwide.

US President Donald Trump warned Monday that any attempt by Iran to disrupt oil shipments through the strait would trigger a response "20 times harder" than previous American military strikes.