The forecast of low inflation in Britain due to Iran war is not worth the paper it was written on
The increase in gas prices in the last 48 hours is without precedent.
Even in the chaotic early weeks of the Ukraine war in 2022, the price of gas never doubled. But that is exactly what has happened to wholesale methane prices in the UK.
And since gas prices are arguably the most important price in the UK – the linchpin of our electricity network, setting electricity prices, underpinning industrial production and the manufacture of chemicals, and indirectly factoring into the price of food and other miscellaneous goods – the drop is a huge consequence.
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Iranian drones are bombing oil and gas facilities in the Gulf, causing a sharp increase in gas prices. It seems no one knows how long this will last, but that is the most important of all questions.
The longer this scenario goes on, the more gas prices are likely to rise. Although the pace of increase over the past 48 hours has been faster than any other comparable period in history, the absolute level of gas prices is much lower than at the peak of the Ukraine war in 2022. Again, given that an unprecedented energy price shock swept across Europe, not to mention the forced deindustrialisation of the continent that continues today, this is far from reassuring.
Are energy prices going to rise again?
The longer this continues, the greater the impact will be on household bills in the UK, which are fixed until June (and benefited from a £150 rebate for one measure in the last budget) but are due to reflect wholesale prices until July.
This is why the events happening in and around Iran remain important for the economy of this country.
The latest big forecast from the Office for Budget Responsibility doesn’t leave much room for interpretation. Judging from this and Rachel Reeves’ presence in the House of Commons today, one might assume that Britain has now overcome the cost-of-living problems it has faced for the last four or five years. This outlook paints a picture of inflation falling to 2% for an extended period.
The Chancellor opened his spring forecast
But the most important data point is on page 109 of the spring forecast. The OBR’s latest forecasts were based on the gas price expectations found in Table A.3. They are more or less flat. After all, these were the prevailing expectations for energy prices when the report was finalised last week.
Britain’s bills cannot escape the forces of Iran war
But since then, as you know, gas prices have skyrocketed. So, essentially, most of the report’s key assumptions about inflation are not worth the paper they are written on.
It is still too early to assess what effect the report will have on the UK economy. Gas prices could potentially decrease in the coming weeks. But equally, it is also possible that they may go even higher. And if they do, the implications for Britain barely recovering from the last energy price shock will be deep and somewhat serious.
