Conflict in Iran Threatens Global Inflation Spike, UK Think Tank Warns
The US-Israel war in Iran is posing a major challenge for Chancellor John Healey's first Budget, according to an influential think tank. The Institute for Fiscal Studies (IFS) warned that higher-than-expected inflation, partly driven by the US-Israel war against Iran and Russia's invasion of Ukraine pushing up energy prices, could reduce planned spending on public services. This means Healey may need to choose between spending cuts, tax rises, or a combination. Chancellor Healey acknowledged that "The consequences of conflict in the Middle East and Europe are hitting countries worldwide, leading to higher prices at the pumps and more expensive mortgages at home."
What this means
The IFS expects recent turbulence on bond markets and higher inflation to add around £10bn to the government's borrowing costs in 2029-30. To maintain departmental budgets in the face of higher inflation, the IFS reckons the government may need to find an extra £25bn in 2029-30, which could point to significant tax rises. The IFS also expects the government to meet its self-imposed fiscal rules by 2029-30, but with a smaller buffer, or "headroom," of approximately £20bn, which is less than the £24bn buffer predicted by the Office for Budget Responsibility (OBR) at the time of the Spring Statement.
Most affected: Inflation and monetary policy
Key takeaway: Monitor Brent crude prices closely; a sustained move above $105 could signal renewed inflationary pressure and a more hawkish RBI stance.
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