What could the UK’s economy look like if the US-Iran conflict continues?

The UK is currently experiencing disinflation, yet how long will this last before the conflict in the Middle East catches up?

Image source: william william on Unsplash 

Impact on the UK thus far

On the 28th of February 2026 the United States and Israel launched military strikes against Iran. Iran being a vastly large oil producing country supplying oil across the world, this has inevitably caused a global supply side shock to the derived markets of oil, such as household energy and manufacturing. This has caused a dramatic spike in the price since the conflict.

Source: HoC Library

Despite the rising commodity prices, the UK’s macroeconomic data had a more positive outlook than economists had predicted. Due to their diverse uses - when a natural resource goes up in value economists predict inflation, oil for example is used in fuel which is a widely consumed commodity prominent in the transport industry which holds a large weighting in CPI (a metric to measure inflation). Inflation (measured by CPI in this instance) fell from 3.3% to 2.8% in March and April respectively. This is likely to be due to the Government’s energy price cap protecting consumers from the early burden of the shock, and easing food inflation. Arguably this intervention is masking the true effect on UK inflation, and the current disinflationary trend may not be able to be upheld as the year progresses.

Source: Trustnet: ONS

But what next?

So long as the conflict lasts it is most likely for inflation to rise again within the coming months and throughout the year. Prior to the conflict it was predicted the rate of inflation would fall to 2% by April and remain constant throughout the year - this is now unlikely. It is very difficult for economists and statisticians to model such a trend accurately as the nature of geopolitical tensions and commodity markets are so volatile. With this in mind it is predicted that by Q3 of 2026 inflation will hit 3.5% according to the HoC Library. In March the BofE announced they were keeping the base rate of 3.75%, this was announced again in June. In terms of GDP things may be dangerous as the UK like plenty of other Western nations is a net energy importer. This means we rely on nations like Iran for our energy markets to remain healthy. The Office for Budget Responsibility forecasts a growth rate of 1.1% for 2026, while consultant Oxford Economics just 0.4% according to the HoC Library. The consensus amongst banks, think tanks and researchers is that the UK is likely to face a small positive change in economic growth. This means further continuing the trend some economists describe the UK to be in currently ‘stagflation’. This period of stagflation in particular could really push up the cost of living looking at the longer term picture. This reinforces the idea that while we don't have particularly harsh effects currently, the worst may be yet to come. 

While this may seem negative the lower growth may lead to downward pressure on inflation which consumers will appreciate, this will also combat the inflationary pressure that is possible with longer term effects of the conflict. However this will likely involve a time lag and be after the initial inflationary pressure due to increased production costs for firms. So instead of the continued pattern of disinflation the data could be suggesting this is just bad weather with a storm yet to come. 

Due to globalization, economic performance is far more reliant on political behaviour and leadership affecting domestic economics than ever (this has been seen in the UK’s leadership with volatile economic figures subject to frequent change in political leadership in the past few years). The UK’s economic performance will vastly be influenced by international decisions between the nations in conflict meaning policy makers in Britain are not likely to get things right first time round at no fault of their own. The extent of the impact on the UK will be seen only as time progresses and therefore we should not remain too hopeful that the UK will continue to experience disinflation and perhaps both the government and big media are instilling a false sense of confidence amongst newsreaders.