A prolonged conflict in the Middle East could send UK inflation soaring to 5.8% and cost the Treasury £8 billion annually, according to new modelling released Wednesday by the Institute for Public Policy Research. The think tank is calling for immediate government intervention, including a temporary £2,000 energy price cap and reduced motorway speed limits, to prevent what it describes as permanent economic damage. “The UK cannot afford to sit back and let another energy shock drive up inflation,” said IPPR senior economist William Ellis.
The warning lands as the Strait of Hormuz—a narrow chokepoint through which a fifth of the world’s oil supply passes—remains blocked by the escalating military action. The Independent reported Thursday that the IPPR’s internal models show the Treasury bleeding up to £8 billion a year through higher debt interest payments and slashed tax revenues if the conflict drags on. That figure is not abstract.
It represents roughly the annual budget for the UK’s entire Foreign, Commonwealth and Development Office. The mechanism is straightforward: blocked oil supply pushes global prices higher, which feeds directly into UK inflation, which forces the Bank of England to raise interest rates, which balloons the government’s own borrowing costs. The IPPR’s inflation forecast of 5.8% is nearly triple the Bank of England’s official 2% target.
Real GDP growth, the think tank cautioned, could plummet to a mere 0.3%. Sam Alvis, associate director at IPPR, drew a sharp historical parallel. “The lesson from Liz Truss is clear: it’s not intervention that spooks markets, it’s poor policy design and an ignorance of investors’ concerns,” he told The Independent. The reference to the 2022 mini-budget crisis—which triggered a gilt market meltdown and forced a prime minister from office—is a deliberate shot across the bow of a Labour government wary of being seen to meddle in energy markets.
The proposed package is a mix of price controls and demand reduction. A temporary energy price cap of £2,000 would sit alongside a 10p cut in fuel duty. But the most tangible recommendation for ordinary drivers is the call to lower speed limits.
The International Energy Agency has already urged member countries to adopt such measures, alongside encouraging remote work, to curb oil demand during supply shocks. The physics is simple. Air resistance increases exponentially above certain speeds.
Motoring groups have long advised that driving at 60 mph instead of 70 mph can cut fuel consumption by up to 15%. For a family filling up a standard Ford Focus once a week, that translates to roughly £8 saved per tank at current prices. “A well-designed intervention, that pairs capping prices with clear incentives to reduce energy demand, would not only protect living standards but prevent the need for damaging interest rate rises,” Alvis said. He framed the cost as an insurance policy: “This is cost-effective, and if permanent damage is avoided, this actually saves the government money.”
The Treasury pushed back sharply. A spokesperson told The Independent: “This is not our war and that is why we did not join it. Our priority is de-escalation.” The statement pointed to existing measures—a £117 drop in the energy price cap, a 5p fuel duty cut extended until September, and frozen rail fares and prescription charges—as evidence the government is already acting.
Behind the diplomatic language lies a fundamental disagreement about who should absorb the shock. The IPPR argues the Bank of England is poorly positioned to respond because interest rate changes take 18 to 24 months to fully influence demand. William Ellis, the think tank’s senior economist, acknowledged the Bank would likely raise rates anyway “to guard against second-round effects and high inflation expectations—particularly if the conflict escalates.”
His solution: the government must step in where Threadneedle Street cannot. “The government can act now where the Bank can’t, with a well-designed policy that acts to cap prices only in the most damaging scenarios,” Ellis said. The IPPR’s report claims the package would cost up to £5 billion annually depending on the severity of the oil shock, but those costs would be offset by lower borrowing costs and higher tax revenues if the intervention prevents a recession. The think tank also revived a politically charged proposal: a strengthened windfall tax on energy company profits.
Such taxes funded the original energy price guarantee during the 2022 crisis, but they remain controversial within a Labour Party that has courted business investment. The economic vulnerability the IPPR identifies is structural. The UK imports roughly 40% of its energy, making it more exposed to global oil price swings than energy-independent nations.
The last time a major supply disruption hit the Strait of Hormuz—during the Iran-Iraq War in the 1980s—global oil prices doubled. The UK economy, then less service-oriented, tipped into recession. Today’s economy is different but not immune.
Households have already absorbed a 50% increase in energy bills since 2021. Consumer confidence, measured by GfK’s long-running index, remains negative. Another inflationary wave would land on exhausted balance sheets.
What this actually means for your family. A 5.8% inflation rate would push the average annual grocery bill up by roughly £290, according to ONS spending data. Mortgage holders on variable rates would see monthly payments rise within weeks of a Bank rate hike.
Renters would face landlords passing on higher costs. The policy says one thing. The reality says another.
The IPPR’s speed limit proposal is likely to face resistance from a public that has already weathered pandemic restrictions, strikes, and a cost-of-living squeeze. Yet the alternative—doing nothing and hoping oil prices fall—carries its own risk. The Bank of England’s own stress tests have modelled scenarios where persistent inflation forces rates above 6%, triggering a housing market correction and a sharp rise in unemployment.
Both sides claim victory. Here are the numbers. The IPPR says its plan costs £5 billion but saves more in avoided damage.
The Treasury says existing measures are sufficient and that joining the conflict is not on the table. The missing variable is how long the Strait of Hormuz remains blocked. A two-week disruption is manageable.
A six-month blockade is a different country. Key Takeaways: - IPPR modelling warns UK inflation could hit 5.8% if the Strait of Hormuz blockage persists, costing the Treasury £8 billion per year in higher debt interest and lower tax revenues. - The think tank proposes a £2,000 temporary energy price cap, a 10p fuel duty cut, lower speed limits, and a strengthened windfall tax on energy profits. - The Treasury rejects the intervention, arguing the UK did not join the war and existing measures—including a fuel duty cut and lower energy price cap—are sufficient. - The Bank of England is expected to raise interest rates regardless, a move the IPPR says the government can preempt with direct price controls. Why It Matters: A sustained oil shock would hit UK households already stretched by years of above-target inflation, pushing up grocery bills, mortgage payments, and rents.
The IPPR’s interventionist prescription tests whether a Labour government scarred by the Truss episode is willing to intervene directly in energy markets—or whether it will leave the burden to the Bank of England and hope the Strait reopens quickly. What comes next depends on two clocks. The first is geopolitical: diplomatic efforts to de-escalate the Iran conflict and reopen the Strait of Hormuz.
The second is economic: the Office for National Statistics releases its next inflation print on May 21. If the headline number ticks above 3%, pressure on both the Treasury and the Bank of England will intensify. The IPPR’s report has drawn a line in the sand.
The government must now decide whether to cross it.
Key Takeaways
— - IPPR modelling warns UK inflation could hit 5.8% if the Strait of Hormuz blockage persists, costing the Treasury £8 billion per year in higher debt interest and lower tax revenues.
— - The think tank proposes a £2,000 temporary energy price cap, a 10p fuel duty cut, lower speed limits, and a strengthened windfall tax on energy profits.
— - The Treasury rejects the intervention, arguing the UK did not join the war and existing measures—including a fuel duty cut and lower energy price cap—are sufficient.
— - The Bank of England is expected to raise interest rates regardless, a move the IPPR says the government can preempt with direct price controls.
Source: The Independent
