The fragile peace deal between Iran and the United States has sparked a glimmer of hope in global markets, potentially alleviating the economic strain caused by the conflict that began in February. The agreement promises to reopen the crucial Strait of Hormuz shipping corridor, a vital artery for oil and gas supplies. This development is expected to have a significant impact on the UK economy, particularly on fuel prices, which skyrocketed during the hostilities.
UK motorists are facing significantly higher fuel costs, with RAC Fuel Watch data showing an average price of 154.72p per litre for petrol and 174.30p per litre for diesel as of Thursday. These prices have risen substantially from approximately 132.05p for petrol and 141.6p for diesel just four months ago. While prices have started to decrease in recent weeks, reflecting the market's response to the peace prospects, experts warn that the rate of these reductions may not mirror the rapid increases experienced earlier in the year.
The impact on household heating bills is more complex. UK gas prices nearly doubled at the conflict's outset, reaching around 157p per therm from less than 80p previously, before falling back to 98p per therm. Energy consultancy Cornwall Insight cautions against expecting a swift return to pre-conflict levels, mainly due to the UK energy regulator Ofgem having set its next price cap for July, which will see the average household bill rise by 13%, or £221 annually, affecting 33 million households across England, Wales, and Scotland.
Air travel, particularly long-haul flights, may continue to see higher fares due to the Gulf region being a primary source of approximately half of Europe's jet fuel. Following the conflict's commencement, jet fuel prices soared from around $784 per tonne to $1,838, leading to fears of shortages and increased ticket costs. While prices have since fallen to about $967 a tonne, Amaar Khan, a jet fuel specialist at Argus Media, anticipates that jet fuel prices will remain above pre-war levels for much of the year, potentially keeping airfares elevated despite airlines having sufficient fuel supplies for the summer.
The conflict had disrupted the broader trend of falling inflation in the UK and globally. The rise in global energy prices contributed significantly to this disruption. The peace deal, if sustained, could contribute to a more stable economic environment, potentially helping inflation return to the Bank of England's 2% target, which was previously anticipated to be reached as early as April before the conflict began. However, the durability of the peace deal remains a key question, especially with negotiations on sensitive issues such as Iran's nuclear programme ongoing.