It is the sort of headline that makes bean counters like me wince. British households and businesses are about to be clobbered by a fresh surge in gas and electricity bills, thanks to the escalating instability in Iran and the broader Middle East. The sabre-rattling in the Strait of Hormuz has sent wholesale energy prices into a speculative frenzy, and given the UK's lamentable reliance on imported energy, the pain will be felt directly on the bottom line of every household budget.
Let me be blunt: this is a tax on consumption that no Chancellor of the Exchequer ever dared to impose. The immediate trigger is the 9% spike in wholesale gas prices this morning on the ICE futures exchange, reacting to the latest salvo of missile tests and naval manoeuvres. But the structural issue is a chronic lack of fiscal discipline in energy policy. For years, successive governments have dithered on nuclear, squabbled over wind subsidies, and flirted with unreliable renewables. Now we are paying the price.
The government's response, predictably, is to mumble about 'protecting consumers' and 'working with international partners'. But talk is cheap, and energy is not. The Strategic Reserve, such as it is, remains a half-baked notion without sufficient storage capacity. Meanwhile, the pound sterling is taking a beating, which only compounds the problem by making dollar-denominated energy imports more expensive. It's a perfect storm for stagflation.
Consider the maths. A 10% rise in wholesale prices typically translates to a 6% hike in the average household bill. With the energy price cap already under review, we are looking at an additional 150 a year for the typical family. That's 150 less to spend on everything else, from groceries to leisure. In a consumer-driven economy, that is a drag on growth. And businesses, particularly energy-intensive manufacturers, will see their margins squeezed. Capital will flee to safer havens, as it always does. The FTSE 100 may hold up due to its international exposure, but the FTSE 250 is already looking jittery.
The Bank of England faces a fraught decision. Inflation is already above target, largely due to energy costs. Governor Bailey cannot afford to ignore this supply-side shock. But raising rates further risks strangling what little economic vitality remains. The yield on 10-year gilts spiked 15 basis points this morning, signalling market anxiety. The bond vigilantes are restless.
What is to be done? In the short term, very little. The government can talk tough about energy independence, but you cannot build a nuclear power station in a month. The only realistic option is to target fiscal support directly at the most vulnerable, while letting market forces allocate resources elsewhere. That means means-tested subsidies, not price caps that distort incentives. The bottom line is that this conflict has exposed the UK's energy vulnerability, and the bill is coming due. The only question is how many more shocks the economy can absorb before something breaks.
For now, gird your wallets. The era of cheap energy is a fading memory. And as every investor knows, memories don't pay the bills.
