Energy prices have been rising sharply amid signs the conflict in the Middle East will not be resolved quickly, fuelling fears that inflation could accelerate. With the conflict between the US and Iran in the Gulf intensifying in recent days, the cost of crude oil has risen sharply. It went above $100 a barrel on Wednesday and hit $105 on Thursday. The war has led to the effective closure of the Strait of Hormuz, preventing supplies of oil and gas from the Gulf from reaching global markets.
Worries over higher inflation have in turn helped to push bond yields in the UK to their highest level in decades. Speaking at a Republican Party convention in Texas on Wednesday, President Trump said he did not think the fighting would end until after the US mid-term elections in November. The price of natural gas has also been soaring on wholesale markets. In the UK, it rose above 200p a therm for the first time since the end of 2022.
Storage levels in Europe are much lower than normal for the time of year, and the need to fill reserves ahead of the winter has helped to push up prices. UK consumers are protected from short term spikes on the wholesale gas markets by Ofgem’s price cap. But if prices remain high for an extended period, households still face steeper bills. The cap is already due to increase by 3.6% at the start of October, with the next change after that coming in January.
The increase in energy costs has in turn raised fears of a spike in inflation, and this has also pushed up yields on government bonds around the world. In the UK, yields on 10-year bonds were at their highest since 2007 today, while those on 20- and 30-year bonds were at levels not seen since 1998. This implies a higher cost of borrowing for the government, at a time when public finances are under pressure. But it could also have a direct impact on households as well, as it affects the rates paid by consumers for some financial products, such as fixed-rate mortgages.
