The ongoing conflict in the Middle East is set to deliver a significant hit to British living standards, with the typical working-age household facing an extra £480 in costs this financial year due to surging energy prices, according to new analysis from the Resolution Foundation think tank.
Market forecasts for higher gas, electricity, and petrol prices, triggered by disruptions linked to the Iran war, have reversed what was expected to be modest growth in household incomes.
Before the escalation, the median working-age household was projected to see a 0.9% rise in living standards. Now, that has flipped to a 0.6% decline, equating to the £480 shortfall.
“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,” said James Smith, Chief Economist at the Resolution Foundation.
“This squeeze will run right through the income distribution.”
How is the war driving up costs?
The Iran conflict has disrupted global energy supplies, with sharp rises in wholesale oil and gas prices feeding through to UK consumers via higher bills and fuel at the pump.
Even following a recent ceasefire announcement, prices have not fallen back sufficiently, leaving energy costs elevated.
Households are already feeling the pinch through:
- Higher energy bills: Wholesale gas prices have spiked, with forecasts suggesting potential increases in the Ofgem price cap later in 2026. Earlier in the year, bills had been on track to fall thanks to government discounts and lower wholesale costs, but the conflict has reversed much of that relief.
- More expensive petrol and diesel: Oil price volatility has pushed up fuel costs, adding to household expenses for commuting and daily life.
- Broader inflation effects: The energy shock is expected to feed into wider prices, eroding real incomes across the board.
Lower-income households are not immune, though they receive some protection from a real-terms increase in benefits.
For the poorest fifth, average income growth has been revised down from 2.8% to just 1.2%. Families with three or more children in the bottom half of the income distribution fare better, thanks to the abolition of the two-child limit, which is projected to deliver 7.7% income growth even after the shock.
Middle and higher earners, however, are set to see the thin growth they anticipated wiped out entirely, tipping into negative territory.
A familiar vulnerability
This marks the latest energy price shock to hit the UK, echoing the turmoil following Russia’s invasion of Ukraine in 2022. Britain remains heavily reliant on imported gas, leaving it exposed to global disruptions, whether from geopolitical conflicts, supply route issues like the Strait of Hormuz, or volatility in oil markets.
Analysts note that while the current spike may not match the scale of the 2022 crisis in absolute terms, it comes at a time when many households are still recovering from elevated costs and when real wages have only recently begun to stabilise.
The Resolution Foundation warns that without significant falls in energy prices, these higher costs “will almost certainly be passed on to households” through bills and pump prices.
Calls for targeted support
With winter approaching, when heating demands peak, the think tank is urging the government to accelerate plans for a social tariff to protect the most vulnerable.
“A social tariff would offer targeted support to struggling households,” the think tank said, particularly those with high energy needs such as families with young children, pensioners, or people using electricity for medical equipment.
The government has already implemented measures like energy bill discounts earlier in 2026, which helped lower the price cap in April. However, the new analysis shows how quickly geopolitical events can undo such progress.
Outlook remains uncertain
The full economic impact depends heavily on how the situation in the Middle East evolves. A lasting ceasefire could ease pressure on markets, but prolonged uncertainty risks embedding higher inflation and delaying interest rate cuts from the Bank of England.
For now, British families are once again confronting the reality that distant conflicts can have a direct and painful effect on household budgets, from the weekly shop to keeping the lights on.
As Smith concluded, the squeeze is broad-based. Benefits provide some buffer for the poorest, but for typical and higher-income households, the energy-driven reversal represents a clear setback to living standards in 2026.
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