The Centre for Economics and Business Research (CEBR) has calculated that UK households will face a combined £2,400 reduction in real income over the next two years as a result of the conflict with Iran. According to the analysis, £1,100 will be wiped off household real income in 2026, with a further £1,300 loss expected in 2027.
The CEBR attributes this financial squeeze to the rise in inflation since the conflict began, combined with weaker wage growth. The think tank points to two main channels through which the war is affecting British households.
Direct and indirect impacts on household finances
“The first is direct: higher energy costs feed straight into bills and into the price of almost everything else, so each pound of pay buys less,” explained CEBR senior economist Liam Daly. “The indirect channel is slower but as important, running through monetary policy and the labour market.”
Daly emphasised that the conflict’s effects are being felt across everyday spending. “A conflict fought thousands of miles away continues to bear on UK households, with real income erosion felt in the weekly shop, at the pump and on the energy bill. Until energy markets calm, the squeeze will persist,” he said.
Chancellor faces tough budget amid rising costs
The analysis comes as Chancellor John Healey prepares for a challenging October budget. Rising inflation and higher borrowing costs are complicating the task of funding Prime Minister Andy Burnham’s policy priorities. Healey acknowledged the pressure but insisted the UK economy remains resilient despite what he called “Iran war inflation” driving up prices for British households.
“There is more to do to restore hope and build a stronger economy where prosperity is shared more fairly across Britain,” Healey said.
James Smith, chief economist at the Resolution Foundation, offered a mixed assessment. “The good news is that underlying pressures are still easing, with services inflation continuing to fall. The bad news is that this fresh bout of inflation is being driven by events in the Middle East that are largely beyond the government’s control,” he said.
Wage growth slows as jobs market softens
Official figures from the Office for National Statistics (ONS) show that average growth in total earnings, including bonuses, fell to 4.1% in the three months to June, down from 4.4% in the three months to May. This slowdown in wage growth is compounding the impact of higher prices on household budgets.
Liz McKeown, ONS director of economic statistics, said the data showed “some softening” in the jobs market despite a broadly unchanged picture overall, in a potential sign of stabilisation after a sharper slowdown earlier this year. “Regular wage growth has remained broadly stable in recent months. However, private sector pay growth has continued to ease, while public sector pay growth remains elevated due to the timing of the latest NHS pay awards,” she added.
The combination of rising energy costs, slowing wage growth, and monetary policy responses means the financial strain on UK households is likely to persist until energy markets stabilise, according to the CEBR. The October budget will be a key test of how the government balances support for households with the need to manage borrowing costs.
