What looked like a steady Spring Statement earlier in March has suddenly aged badly says Matthew Allen, Lecturer in Economics at the University of Salford.
At the time, Rachel Reeves was able to point to falling inflation and softer energy prices as supporting a more cautious fiscal approach. But the unexpected escalation of conflict involving Iran, the US and Israel have fundamentally shifted the economic backdrop almost overnight. Oil prices have surged sharply above $100 a barrel, their highest in years, following repeated strikes and disruption to key supply routes such as the Strait of Hormuz, through which roughly 20 % of the world’s oil flows .
This sudden spike has tangible effects for UK households and firms. Domestic petrol and diesel prices are climbing rapidly, with forecourts already reflecting a significant 5 p per litre increase and further pressure expected if geopolitical tensions persist. This comes at a time when many consumers were just starting to feel some relief from earlier cost-of-living pressures
Businesses, never insulated from energy costs, are already signalling rising input costs, from logistics and transport to manufacturing. Those costs inevitably cascade downstream to consumers. The short-term impact of higher energy is already evident in markets: forecasts for inflation cuts have been pushed back, and financial markets now see a much lower probability of immediate interest rate reductions. Gilts and other borrowing costs have risen as investors price in higher inflation risk and delayed Bank of England easing .
For the Spring Statement itself, the contrast with today’s reality is stark. The Chancellor’s official forecasts were made with energy prices at significantly lower levels and inflation trending down. Yet this conflict, and the associated oil shock, threatens to reverse that hard-won progress. Higher fuel costs feed directly into headline inflation through transport, distribution and even food prices, increasing the risk that overall CPI will trend back up .
That matters for the Bank of England. Since late 2025, the central bank had been cautiously considering a cycle of rate cuts as inflation fell towards target. But the sudden risk of a renewed inflation uptick, driven by imported energy costs, means policymakers may have to hold rates higher for longer, or even rethink the trajectory entirely. Markets are already pricing in a reduced chance of rate cuts this year .
There’s a broader lesson here: fiscal policy can only ever be as forward-looking as the economic environment allows. An unexpected energy shock of this magnitude throws a curveball at both Treasury planning and monetary policy. The Spring Statement was drawn up under very different conditions; today’s oil price reality makes clear just how fragile the inflation outlook remains. If higher energy costs persist, the risk of inflation re-accelerating, with knock-on effects for living standards and business costs, is very real, and policymakers will need to respond accordingly.
Following a G7 finance ministers’ call yesterday, Rachel Reeves signalled the UK’s readiness to support a coordinated release of emergency oil reserves to help stabilise global energy markets in the face of the Middle East crisis. She warned fuel retailers against exploiting the situation for “excess profits” and has asked regulators to monitor pricing closely, reflecting a clear recognition that unchecked oil price spikes feed directly into higher costs for firms and households alike. This is an acknowledgment that the oil shock, which has already pushed petrol prices higher and threatens to push inflation back up, isn’t just a distant geopolitical problem, but one with real-time impacts on consumer spending, business input costs and the broader inflation outlook. If these pressures persist, the Bank of England may be forced to reconsider its monetary stance and hold or even raise interest rates to counter renewed inflationary momentum (The Guardian, 2026).
Reeves also confirmed that planned fuel duty increases will still proceed, with phased adjustments expected later this year and into the next. While the Treasury views this as a necessary revenue measure, the timing is sensitive. Fuel duty feeds directly into transport and logistics costs, meaning businesses already grappling with higher wholesale energy prices face a further squeeze. Those additional costs rarely stay at firm level; they are typically passed through supply chains and onto consumers in the form of higher prices for goods and services. At a moment when geopolitical tensions are already pushing up oil prices, maintaining scheduled fuel duty rises risks amplifying inflationary pressures and further straining household budgets
