A further escalation in the Middle East conflict could have a severe impact on government borrowing, with analysis suggesting the scenario would eradicate three-quarters of Rachel Reeves’ fiscal headroom built up in the autumn budget.

The influential Resolution Foundation has found that a “severe but plausible scenario”, in which the conflict intensifies and delivers the largest hits to the economy, would result in government borrowing increasing by £16bn a year in 2029-30.

Reeves, the chancellor, built up fiscal headroom of £21.7bn in the autumn budget, to be able to meet the fiscal rule that spending must be met by tax revenues.

Living standards have been hit by the Iran war, with petrol prices surging 20% and energy bills forecast to rise by up to 20% in July, but there are fears about the wider economic impact on the UK.

Inflation rose to 3.3% last month from 3% in February driven by higher petrol and diesel prices and air fares, official figures showed today.

The thinktank said the chancellor should ensure planned support with energy bills is targeted and temporary, as unfunded universal support risks pushing interest rates higher.

Borrowing £20bn to provide additional support for households would push up mortgage rates by a 0.4 percentage points, the foundation’s modelling showed.

Simon Pittaway, senior economist at the Resolution Foundation, said:

No-one knows which direction the current conflict in the Middle East will take but we do know that it will make us all poorer.

The cost of filling up the car has already increased and, from July, so too will energy bills.

The conflict is going to make the state poorer too. A deterioration in the conflict that sustains some of the worst hits to the economy could deal a £16 billion hit to the public finances.

The Chancellor deserves credit for building up enough of a buffer in last year’s budget to withstand a hit of this scale. And by keeping any support with energy bills targeted and temporary, she should be able to weather this latest economic shock with her fiscal rules intact.

Yvette Cooper, the foreign secretary, has again warned that the closure of the strait of Hormuz is “hitting the global economy”, amid international efforts to safeguard the crucial shipping route.

The Resolution Foundation said the impact of the conflict has so far been a lot more “muted” compared to Russia’s invasion of Ukraine, when gas prices rose 300p per therm, compared to a peak rise of 78p in March 2026.

But it said the UK economy appears more vulnerable to the conflict than others because of its exposure to gas, which accounts for 62% of household energy consumption, and the “heightened sensitivity” of UK interest rates to global developments.

Despite UK gross domestic product being “half as energy-intensive as the world average”, both the International Monetary Fund and the Organisation for Economic Co-operation and Development downgraded UK growth by 0.5 percentage points this year – the biggest markdown of any member of the G7 group of advanced economies.

The Resolution Foundation estimates that for a typical recent first-time buyer reaching the end of their fixed rate mortgage deal, costs have increased by around £100 since the start of the war.

The government borrowing figures for the last financial year will be published by the Office for National Statistics on Thursday.

A HM Treasury spokesperson said:

The forecasts here are pure speculation. The impact of the conflict is, as the report’s authors say themselves, highly uncertain.

The report reinforces why we are right to focus on making the UK more resilient by securing greater energy security and improved public finances.

We entered this conflict in a stronger position because of the choices this Government took to build economic stability. We are boosting our energy security, backing British industry and protecting households in a targeted and timely way.

European stock markets have moved cautiously higher, with the exception of London’s FTSE 100 index, which has dipped 0.1%.

The UK’s benchmark index fell 13 points to 10,484 in early trading.

Germany’s Dax rose nearly 0.5%, while France’s CAC, Italy’s FTSE MIB and Spain’s Ibex all added 0.2%.

Brent crude has dipped 0.5% to $98.03 a barrel.

Donald Trump unilaterally extended the ceasefire between the US and Iran, but the US continues its blockade of Iranian ports, and the strait of Hormuz remains closed.

There are reports that a container ship off the coast of Oman was fired at by an Islamic Revolutionary Guard Corps gunboat, according to the United Kingdom Maritime Trade Operations.

Condoms are also going up in price. The world’s top condom producer, Malaysia’s Karex, plans to raise prices by 20% to 30% and possibly further if supply chain disruptions drag on due to the Iran war, its chief executive has said.

Karex is also seeing a surge in condom demand as rising freight costs and shipping delays have left many of its customers with lower stockpiles than usual, CEO Goh Miah Kiat told Reuters.

The situation is definitely very fragile, prices are expensive … We have no choice but to transfer the costs right now to the customers.

Karex produces more than 5 billion condoms annually and is a supplier to leading brands like Durex and Trojan, as well as national health systems such as the UK’s NHS and global aid programmes run by the United Nations.

Since the conflict began in late February, Karex has seen costs increase for everything from synthetic rubber and nitrile used in manufacturing condoms to packaging materials and lubricants such as aluminium foils and silicone oil, Goh said.

Food inflation has also picked up again, to an annual rate of 3.7% last month, up from 3.3% in February.

Chocolate and confectionery, meat, fish, and soft drinks became dearer, while bread and cereals, and dairy products pulled the inflation rate lower.

The Food and Drink Federation has crunched the numbers.

• Prices rose the fastest for beef and veal (18.8%), whole milk (12.7%) and confectionary products (11.1%).

• Prices fell for nine categories, with the largest drops for: flours (-6.8%), olive oil (-6.2%), and pizza (-2.6%).

• It will take 7-12 months for cost pressures on manufacturers to feed through to consumers

Liliana Danila, chief economist at the FDF, said:

The clouds are gathering, but the storm has not yet broken on rising food and drink inflation. The war in Iran has delivered a cost shock that is already too large for manufacturers to absorb in full. The impact on prices will take time to work its way through the system, but it’s only a matter of time before it does. For manufacturers, long-term contracts with suppliers and retailers mean it can take up to a year for higher costs to be fully passed through. But where products are less processed, or supply chains are shorter, prices will move more quickly. As a result, absent of any government intervention, we expect a gradual but persistent pickup in food inflation, reaching around 9%–10% by the end of the year.

This means we’re in a crucial window for action to limit the impact on shoppers. We’re working with government to look at the levers they can pull now to support food manufacturers now to soften the blow on consumers later in the year.

In better news for consumers, clothing prices fell by 0.8% in the 12 months to March, compared with a rise of 0.9% in the 12 months to February, marking the lowest recorded since March 2021, when prices were affected by the Covid-19 pandemic.

The average price of petrol rose by 8.6p a litre between February and March, compared with a fall of 1.6p a litre a year earlier. The average price was 140.2p a litre, the highest since August 2024, the ONS said.

Diesel prices rose even more, by 17.6p a litre, compared with a drop of 1.6p a litre this time last year. The average price stood at 158.7p a litre, the highest since November 2023.

Air fares also increased, by 10% between February and March, compared with a fall of 0.3% a year ago. It was the largest monthly increase between February and March since 2016, when it was 22.9%. The upward effect came almost entirely from long haul routes, where the return flights were on the Tuesday immediately after the Easter weekend.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

It’s UK inflation day!

Inflation in the UK accelerated to 3.3% in March driven by higher fuel prices because of the Iran war.

The annual inflation rate rose from 3% in February, according to the Office for National Statistics.

On a monthly basis, consumer prices rose 0.6% in March, compared with a rise of 0.3% in March 2025. Motor fuels were the biggest factor behind the increase, while clothing made a downward contribution to inflation.

Transport inflation, including motor fuels and airfares which also rose, almost doubled to 4.7% in March, from 2.4% in February, the highest recorded since December 2022.

Asian stock markets mostly rose as did US stock futures, and oil prices fell after Donald Trump said he would extend the two-week ceasefire with Iran, amid frantic efforts to bring the two sides back to the negotiating table.

Japan’s Nikkei and China’s CSI 300 both rose 0.4% while Hong Kong’s Hang Seng fell 1.4%.

The US military maintained its blockade of Iranian ports, and Iran has said the US must end it in order for negotiations to resume.

Brent crude has fallen 1.1% to $97.37 a barrel, but remains near $100 a barrel, with the strait of Hormuz still closed.

The Agenda

• 9.30am BST: UK house prices and rents

• Noon BST: US MBA mortgage applications

• 3pm BST: Eurozone consumer confidence