Energy Price Shock Threatens Household Gains in 2026
A renewed escalation of conflict in the Middle East could significantly undermine improvements in living standards for households across the United Kingdom, according to a leading economic thinktank. Analysts warn that rising oil and gas prices linked to the crisis could offset modest financial gains expected for British families this year.
The Resolution Foundation said the disruption to energy supplies caused by tensions involving Iran could trigger a price shock large enough to wipe out the anticipated £300 increase in living standards for a typical working-age household in 2026.
Oil and Gas Disruption Could Push Up Inflation
According to the thinktank, the UK economy had been on course for a modest improvement in living standards this year, supported by rising wages and changes to welfare payments. However, a sustained surge in global energy prices could quickly reverse that progress.
The risk centres on supply disruption in the Strait of Hormuz — a key global shipping route through which roughly 20% of the world’s liquefied natural gas passes. Any effective blockade or prolonged restriction in the strait could have a significant impact on global energy markets.
If higher oil and gas prices persist, the Resolution Foundation estimates the effect could add around one percentage point to UK inflation. Household energy bills could rise by approximately £500 a year for a typical household.
While the economic impact may not match the scale of the shock following Russia’s invasion of Ukraine in 2022 — which drove sharp increases in food, fuel and energy prices — analysts say the consequences could still be substantial for British households already facing a prolonged cost-of-living squeeze.
Forecasts Show Potential Gains for Lower-Income Families
In its analysis of the government’s spring economic forecast, the Resolution Foundation estimated that living standards for a typical working-age household were on track to increase by around £300 over the next year, equivalent to a 0.9% rise.
Lower-income households were expected to see a larger improvement of roughly £800, or 3.9%. This increase is largely attributed to the removal of the two-child limit on certain benefits and an above-inflation rise in Universal Credit payments.
If realised, the improvement would represent the second strongest year for living standards among lower-income households in the past two decades.
However, economists warn that an energy price shock could erase these gains before they materialise.
Calls for Targeted Energy Support
James Smith, research director at the Resolution Foundation, said the government should consider introducing a targeted “social tariff” for energy to protect households most vulnerable to price shocks.
He argued that broad, universal energy subsidies — similar to those introduced during the energy crisis following Russia’s invasion of Ukraine — had proved extremely expensive.
“We have called for the government to develop the infrastructure for a social tariff targeting households with high energy needs and low incomes,” Smith said.
“Trying to support everyone equally becomes extremely costly, as previous policies showed.”
Economists Warn Against Costly Universal Subsidies
The Institute for Fiscal Studies (IFS) has echoed those concerns. The thinktank noted that the universal energy support package introduced during the previous crisis cost the government around £35bn.
Helen Miller, director of the IFS, said such policies had contributed to rising public debt in recent years.
“This kind of government support is a key reason debt has been increasing,” she said.
“Partly because economic shocks keep occurring, and partly because fiscal policy has focused on stabilising debt rather than reducing it during stronger periods.”
She added that future assistance should be carefully targeted at households most in need rather than applied across the entire population.
Defence Spending Plans Add Further Fiscal Pressure
The IFS also highlighted the financial trade-offs involved in accelerating the government’s pledge to raise defence spending to 3% of GDP.
Bringing that target forward to 2030 would cost around £14bn per year, analysts estimate. Without higher taxes, such spending could effectively eliminate planned increases in other areas of government expenditure.
Longer-Term Living Standards Still Under Pressure
Ruth Curtice, chief executive of the Resolution Foundation, said the broader outlook for UK living standards remains uneven despite the potential short-term improvement this year.
“The immediate economic outlook for Britain is highly uncertain,” she said, noting that economic forecasts can quickly become outdated during periods of geopolitical instability.
“This coming year could be a decent one for living standards — and a particularly strong one for poorer families — as wages and benefits rise faster than inflation. But a fresh energy price shock risks puncturing this good news.”
Meanwhile, the Joseph Rowntree Foundation has warned that the longer-term outlook may be weaker than some official projections suggest.
Its modelling indicates that average household disposable income could increase by only around £40 across the entire parliamentary term from April 2024 to April 2029 once inflation is taken into account.
That estimate contrasts with the government’s claim that living standards could rise by £1,000 annually by the next general election — a figure based on real household disposable income, which does not factor in housing costs.
Conclusion
The analysis highlights how geopolitical instability can rapidly affect domestic economic prospects. While many UK households could see modest improvements in their finances during 2026, economists warn that another global energy shock could quickly erase those gains, leaving living standards once again under pressure.
Edward Langley is a contributor at Mediarunsearch.co.uk, covering a wide range of topics including news, politics, business, technology, sport, entertainment and lifestyle. He focuses on delivering clear, balanced reporting and useful information that helps readers stay informed about current affairs and developing stories. His work highlights issues, trends and events that matter to everyday audiences, with an emphasis on accuracy, relevance and accessible journalism.