What the Iran conflict could mean for your finances

The Iranian conflict has already reshaped global politics as well as having a devastating human impact. But its effects are also being felt much closer to home in household budgets, mortgage rates, and investment portfolios. As the conflict, hopefully, draws to some kind of conclusion, the longer‑term consequences for personal finances are still unfolding, and damage to energy supply chains has already been done.

The most likely economic legacy is a mix of higher inflation and weaker growth. Energy shocks tend to push fuel and power prices up quickly, while the hit to economic growth comes later as households and businesses are forced to spend more on energy and transport, leaving less money for everything else.

The UK economy is exposed to higher energy costs

The UK is particularly vulnerable because it imports much of its energy, and although there is diversity of supply, global prices set the cost to consumers. That’s why rises in oil and gas prices have been felt so quickly at the forecourts and are likely to feed into household energy bills if the crisis drags on – notably through the upcoming Ofgem ruling on energy prices expected in July.

According to recent surveys, business confidence has already taken a hit, and economic forecasts have been downgraded sharply. The International Monetary Fund now expects UK growth to be well under 1% this year. This is one of the largest downgrades among major economies, and the average forecast among economists is now just 0.6%. Even if energy flows improve, the weeks of disruption and higher prices will still filter through supply chains, pushing inflation higher.

Energy acts as a “stealth tax” on household finances

With public debt already elevated, there is limited room for the government to shield households with broad‑based support. That means more of the adjustment is likely to be felt directly by consumers and businesses.

For households, higher energy prices act like a tax. More expensive petrol and utility bills leave less money for discretionary spending, even if wages continue to rise modestly. Over time, this quietly erodes living standards. Higher transport costs and rising fertiliser prices – which are linked to gas markets – can push food prices up too. These “second‑round” effects, typically with a delayed reaction, are often where inflation becomes most painful, as everyday essentials start to cost even more.

Mortgage costs could be higher and more uncertain

Before the conflict escalated, many borrowers were hoping for lower mortgage rates in 2026. That optimism has faded. With inflation risks rising again, the Bank of England is expected to keep interest rates on ice as it assesses the extent to which higher energy prices feed through into headline and core inflation.

Mortgage rates have already responded to the new environment. Fixed‑rate deals that had been drifting lower at the start of the year have moved back up, with many lenders withdrawing products altogether and re‑launching them at higher rates. Typical two‑year fixed mortgages have climbed to over 5.5% again.

While the ultra‑low rates of the 2010s were always unlikely to return, the challenge now is lack of confidence. Rapid swings in mortgage pricing make it harder for buyers to plan, which can derail transactions and risk denting the housing market more broadly. Economic uncertainty stemming from the Iran war has already hurt buyer demand according to mortgage lender Halifax, commenting on a fall in UK house prices of 0.5% in March.

Better savings rates, but inflation still matters

Savers are one of the few relative winners in this environment, at least on the surface. Higher interest rates mean better returns on cash savings, particularly easy‑access accounts and Cash ISAs. However, inflation remains the key issue. If prices rise faster than savings rates, the real value of cash still falls. 

So, assuming the Bank of England (BoE) resists increasing interest rates in the coming months, if inflation flares up savers stand to lose spending power. Those that set the BoE interest rates are likely to look through short-term price volatility, only becoming more concerned if second-round inflation effects begin to appear in food and other goods prices, as well as in wages. 

This makes it more important than ever to shop around rather than leaving money in poorly paying accounts. Competitive rates are out there, but they don’t always last, and loyalty isn’t often rewarded. An online savings platform like Charles Stanley Direct Cash Savings, powered by Bondsmith, allows you to find better rates in one place and switch easily between accounts from different banks and building societies.

Investment portfolios: careful diversification necessary

In a more fractured world shaped by structurally higher energy and food inflation and constrained consumer spending power, portfolio allocation may need to be more selective, more valuation aware, and more focused on resilience. 

Businesses with strong brands, essential services, or contracts that link payment increases to inflation may be better positioned than those reliant on discretionary consumer spending. Companies with pricing power – the ability to pass higher costs on to customers – tend to be more resilient to energy shocks, especially if they have strong balance sheets and tangible assets. Meanwhile, highly indebted or speculative businesses can struggle. It’s also a time to focus on long-term structural growth drivers that can power through despite the hurdles of inflation and weaker overall economic activity.

Some equity markets have already shrugged off recent events after an initial dip and have recovered significant ground. That’s especially the case in the US where the S&P 500 has powered to all-time highs driven by technology stocks where investors perceive growth to be resilient. 

The overall impact on US economic activity is also judged to be limited given that consumer spending is disproportionately driven by higher-income households whose spending patterns are less sensitive to energy prices. In contrast, the geographies more vulnerable to energy fluctuations – notably Europe, Japan, and certain emerging markets such as India – have recovered more modestly.

Bond markets, too, bear the scars of recent events with prices lower and yields significantly above their pre-crisis levels. The UK is a case in point with the 10-year gilt yield at around 4.75%, significantly above its end of February level of 4.25%. The traditional assumption that bonds cushion equity volatility can break down when inflation is high, and investors do need to consider further dimensions of diversification in a more inflationary world. 

That said, bonds still play a role, and high starting yields from this point mean in terms of a positive total return – income plus capital – they can absorb a hit from interest rate and inflation expectations ratcheting higher still.

Charles Stanley Direct Cash Savings