US‑Iran War To Keep UK Inflation High and Economic Growth Weak for Years, Budget Watchdog OBR Warns

The Office for Budget Responsibility (OBR) has warned that the US‑Iran conflict will keep UK inflation elevated and economic growth subdued for years, cutting its 2027 growth forecast to 1% from 1.6% and highlighting the impact of higher energy costs on households, businesses and the public finances.

The independent forecaster published its latest Economic and Fiscal Outlook on Wednesday, alongside Chancellor John Healey's Budget. The report describes the conflict as a significant economic shock whose course and consequences remain highly uncertain, and says its forecasts are sensitive to wholesale oil and gas prices.

Growth To Dip Before Only Gradual Recovery

The OBR expects gross domestic product (GDP) to grow by 1.2% this year, up from its previous estimate of 1.1%. Growth is then forecast to slow to 1% in 2027 before recovering to 1.6% in 2028 and 1.8% in 2029. It is expected to ease to 1.7% in 2030 and 1.6% in 2031.

The downgrade is therefore concentrated in 2027, rather than reflecting weak growth throughout the forecast period. But the recovery the OBR predicts is still modest by historic standards and is set against a backdrop of higher borrowing costs and energy prices than it expected earlier in the year.

The OBR links much of the near‑term weakness to the impact of the conflict on global energy markets. Higher oil and gas prices increase costs for firms, raise household bills and reduce the scope for stronger growth elsewhere in the economy.

Prices Squeeze Household Budgets

Inflation is forecast to peak at 3.8% in the first quarter of 2027. The OBR expects it to fall back to the Bank of England's 2% target by the third quarter of 2028, meaning several more years in which price rises are above the Bank's goal.

Higher prices are expected to squeeze household finances. Real household disposable income per person is forecast to fall by 0.6% in the 2026‑27 financial year. It is then projected to grow by an average of 0.6% a year over the rest of the forecast period, leaving the recovery in living standards relatively slow.

Motorists are already feeling the pressure. According to the Fuel Finder price index, petrol averaged 172.2p a litre and diesel 198.7p on 29 October. At those prices, filling a 50‑litre tank costs about £86 for petrol and £99 for diesel.

The OBR notes that higher energy costs affect lower‑income households in particular, because bills take up a larger share of their budgets. That leaves some families with less scope to cut back on other spending if prices remain elevated.

Interest Rate Outlook Clouded by Conflict

Bank Rate stands at 3.75%, and the Bank of England is due to announce its next decision on 5 November. Its September decision noted that the conflict had raised energy prices and that inflation was likely to rise further.

The report does not settle what the Bank will do next. The conflict has increased uncertainty over the path of interest rates, as higher energy prices threaten to prolong inflationary pressure. That uncertainty feeds back into business investment and the housing market, where borrowing costs are sensitive to expectations of how long Bank Rate will stay high.

Higher Debt Costs Limit Room for Fiscal Policy

The OBR forecasts that debt‑interest costs will average £14bn a year more than it projected in March. The government's Budget document says this more than accounts for the change in forecast borrowing and the reduction in its fiscal headroom in 2029‑30.

Public sector net debt is forecast to be lower at the end of the period, in 2031‑32, than at the start, in 2026‑27. That does not mean it falls in every year in between. Higher interest payments absorb resources that might otherwise have been used to reduce debt more quickly, cut taxes or increase public spending.

The OBR says that the fiscal position is now more sensitive to movements in interest rates and energy prices, as higher borrowing costs and the impact of the conflict on inflation feed through the public finances.

Outlook Hinges on Duration of War

The outlook depends heavily on how long the conflict lasts. Reuters reported in September that US President Donald Trump had predicted the war would end immediately after the US midterm elections on 3 November. Its eventual duration remains uncertain.

A prolonged conflict could sustain pressure on energy prices and weigh on UK growth. A lasting reduction in disruption to energy supplies could ease some of that pressure, although the scale of any change would depend on developments in energy markets and the wider economy.

The OBR says that the balance of risks around its central forecast is wider than usual, reflecting uncertainty over the course of the war, how quickly energy prices adjust and how households, firms and financial markets respond.