Energy bills and inflation surge, yet the economy shows resilience—Britain amid the US-Israel-Iran war

With fuel supplies tightening, U.S. refineries have ramped up production: Exxon’s refinery utilization rate reached 95% in Q2 2026, Chevron’s hit 97%, and Shell reported a staggering 102%. Although gasoline and diesel output hit record highs, crack spreads remain at historically elevated levels—indicating that fuel prices will stay stubbornly high for the foreseeable future, regardless of how the Middle East situation evolves. “Right now we’re facing a diesel shortage because all refineries in the Persian Gulf are unable to export their products,” Joe DeLaura, Senior Energy Strategist at Rabobank, told The Wall Street Journal in July. “Crude oil is just an input—but diesel is the lifeblood of the industrial economy: agriculture, construction, mining, and the entire supply and distribution chain all depend on it.” This warning echoes an earlier one issued in July by Amrita Sen of Energy Aspects, who stressed that fuel prices matter more to consumers than crude prices, since fuels—not crude—are what people actually consume. “Product markets—like diesel and others—are far tighter than the crude market,” she said at the time. Rising energy bills push UK inflation to 2.9% As the engine of modern society, energy prices have far-reaching ripple effects—and sharp increases inevitably impact household living standards. On August 19, 2026, the website OilPrice.com cited a report from London-based City A.M. detailing these developments. City A.M. reported that the UK’s Consumer Price Index (CPI) inflation rate rose from 2.6% in June 2026 to 2.9% in July. Services inflation dipped from 3.6% to 3.4%, while core CPI—excluding food and energy—held steady at 2.6%. Following the UK energy regulator Ofgem’s July adjustment to the price cap, natural gas and electricity became the main drivers behind the inflation uptick: average dual-fuel bills jumped £221 to £1,862. Rising energy costs—combined with persistently high borrowing costs—are complicating the outlook for both the UK government and the Bank of England, which held its base rate steady at 3.75% in July. Official data show that the inflation spike following the energy price cap adjustment may mark the beginning of a prolonged period of elevated prices. Data released by the UK Office for National Statistics (ONS) show that the 12-month CPI inflation rate for July 2026 stood at 2.9%, up from 2.6% previously. Services inflation fell to 3.4%, while core inflation—excluding food and energy—remained unchanged at 2.6%. Since services inflation reflects wage pressures, it is closely watched by Bank of England policymakers. Mike Hardie, Deputy Director for Prices at the ONS, commented: “Upside pressures include furniture prices, which declined less than usual for this time of year, and clothing prices, whose fall was muted due to reduced discounting. Meanwhile, raw material and factory-gate prices eased again, driven respectively by falling crude oil and refined product prices.

UK inflation rises ahead of central bank rate decision—the window for holding rates steady is narrowing

UK inflation rose further ahead of the central bank’s upcoming interest-rate decision, as the energy price shock continues to feed through to household bills and consumer spending—squeezing the Bank of England’s room to hold rates steady. On September 16, the UK Office for National Statistics (ONS) reported that the Consumer Price Index (CPI) rose 3.1% year-on-year in August—up from 2.9% in July and the highest since March 2026—broadly in line with market expectations. Rising gasoline and diesel prices were the primary drivers, while higher household energy bills also contributed significantly to the overall inflation increase. The Bank of England is set to convene its Monetary Policy Committee (MPC) meeting this Thursday. Markets widely expect the Bank to keep its base rate unchanged at 3.75%. However, if the energy shock continues pushing inflation higher, traders have begun pricing in a potential rate hike as early as November. Following the release of the inflation data, the market-implied probability of a rate hike this week actually fell—from 35% to 25%—suggesting that investors still see a strong likelihood the Bank will maintain its wait-and-see stance in the near term. Meanwhile, rising inflation is also intensifying fiscal pressure on the government. UK government bond yields have surged sharply, shrinking the government’s fiscal headroom by more than half—further constraining policy flexibility ahead of the October budget announcement. Energy prices emerge as the main driver of inflationary pressure The acceleration in August inflation was primarily energy-driven. According to the ONS, surging gasoline and diesel prices were the top contributors to the monthly CPI rise; airfare prices and factory-gate prices also rose, while higher household energy bills provided additional upward momentum. Ofgem raised the household energy price cap by 13% in early July—directly lifting electricity and gas prices. At the same time, Brent crude has recently broken above $100 per barrel again, and Ofgem has already announced plans to raise the energy price cap once more in October—suggesting energy prices may continue supporting inflation over the coming months. David Rees, Schroders’ Global Economics Head, noted that UK inflation could rise further in the coming months, as energy, industrial goods, and food prices continue passing through to end consumers. According to The Wall Street Journal, markets currently anticipate UK CPI may reach—or even exceed—4% early next year, double the Bank of England’s 2% target. Core inflation remains stable—providing temporary breathing room for the Bank That said, rising headline inflation does not signal broad-based price pressures across the economy. In August, core inflation—excluding food and energy—held steady at 2.6%, and services inflation—a key focus for the Bank—remained unchanged at 3.4%. This suggests current inflationary pressures remain largely confined to external factors like energy, rather than evolving into broader domestic price pressures. Francesco Pesole, ING strategist, observed there is “still no evidence of inflationary pressures spreading beyond energy”—a view lending support to dovish voices within the Bank.

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UK annual inflation rose to 3.5% in September, exceeding forecasts due to record diesel and petrol prices driven by Middle East conflict impacts on oil supply. This surge prompts expectations of Bank of England interest rate hikes.

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