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The conflict in the Middle East has unsettled energy markets, reviving inflationary pressures at an uncomfortable moment for the UK economy, CEBR have said on Thursday.
The parallels with 2022 are immediately apparent: geopolitical disruption, rising energy prices, and renewed concern over the inflation outlook. But the similarity is only partial.
This is a different shock, originating from a different part of the global energy system, and landing in a different domestic economy.
One way to see this is in the divergence between oil and gas markets.
Following Iran’s strike on the Ras Laffan terminal in Qatar, a key LNG export facility, Brent crude prices have surged to above $110 per barrel, eerily close to the peaks seen during the Russia-Ukraine shock. UK gas futures have also risen, reaching around 172 pence per therm – their highest level since early 2023 – but remain well below the extremes of 2022.
This divergence reflects the fundamentally different nature of the disruption.
Gas accounted for around 40% of UK electricity generation at the onset of the Russia-Ukraine conflict, and as Europe scrambled to replace Russian supply, wholesale gas prices saw an unprecedented surge. The impact fed quickly into household energy bills and business costs. At the same time, Ukraine’s role as a major exporter of wheat, alongside the role of natural gas as a key input into fertiliser production, created a second inflationary channel, pushing up food prices alongside energy.
The current episode is narrower in scope, and its geography matters. The Strait of Hormuz remains a critical chokepoint, through which around a fifth of global oil supply and a significant share of LNG trade passes. However, the economies most directly exposed to disruption are those reliant on Hormuz-routed shipments, particularly in Asia, including China, India, Japan and South Korea.
In turn, the UK’s exposure is less direct. While it imports relatively little oil or gas directly from the Gulf – the most significant being Qatar, accounting for only a small share of total gas imports – it remains dependent on global energy markets. As a result, the UK is a price taker in global energy markets.
So what are the implications for the UK? The initial impact will be felt through oil. Higher prices feed into petrol and diesel costs, freight and lo,gistics, and a wide range of industrial inputs, raising costs for businesses and consumers alike. Today, oil plays a negligible role in UK electricity generation – less than 1% of the mix – meaning the shock enters the economy first through transport and production costs rather than directly through energy bills.
Households will nevertheless feel the effects. Higher business input costs will pass through into consumer prices, while rising gas prices will, over time, feed into energy bills via the Ofgem price cap. Following the strike on Ras Laffan and the resultant surge in UK gas futures, we estimate the cap could rise by around 16% quarter-on-quarter in Q3, to approximately £1,900, assuming gas prices ease from current elevated levels within a week. If these elevated prices persist for a month, the increase could reach around 28%, taking the cap to over £2,100.
The inflation implications are meaningful, though less severe than those seen in the aftermath of the Ukraine shock. In the milder scenario, inflation could rise by around 0.7 percentage points. In the more persistent scenario, this could be closer to 1.2 percentage points.
That said, just as important as the nature of the shock is the condition of the economy absorbing it. In 2022, the energy shock landed on an economy running hot: pent-up demand was being released, supply chains were strained with elevated freight costs globally, and the labour market was exceptionally tight. These conditions amplified the inflationary impact, as wages rose in response to higher prices, embedding second-round effects.
That dynamic is far less likely today. Growth has moderated, the labour market is loosening, and wage growth is more subdued. Global supply chains have largely normalised since the pandemic. Taken together, these conditions materially reduce the risk of a wage-price spiral of the type seen in 2022.
But this is not an unambiguous positive. A weaker economy is not insulated from the shock; it is simply exposed to it differently. With limited demand strength, higher energy costs are less likely to feed into sustained inflation and more likely to weigh on activity. Real incomes will be squeezed just as consumption is showing signs of recovery, while businesses face additional cost pressures on already thin margins. This, in turn, risks weighing further on an already softening labour market, compounding a bleak employment outlook, while also making the path to monetary easing more uncertain.
Our estimates suggest the conflict could shave around 0.1 to 0.3 percentage points off UK GDP growth over the next twelve months, adding to an outlook that has already been downgraded, including by the OBR.
The key risk for the UK is therefore not a repeat of the 2022 inflation surge; the structural conditions that amplified that episode are not present in the same form. But that is limited comfort. An economy already struggling to build momentum faces a different challenge: not a spike in prices that eventually unwinds, but a sustained drag on real incomes, and activity keeping growth subdued and inflation above target.
NB: This analysis reflects market conditions following Iran’s strike on the Ras Laffan LNG export facility. Given the rapidly evolving situation, energy prices and associated economic impacts may shift significantly in the coming days.
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