Households in the UK are set to face a more severe cost of living increase over the next two years, exacerbated by the Iran conflict, according to a prominent organization. The International Monetary Fund has downgraded its projections for UK economic growth, dealing a significant setback to Chancellor Rachel Reeves and Labour’s economic recovery plans.
The IMF has highlighted the grave repercussions of the Middle East conflict, cautioning that a global recession could be imminent in a worst-case scenario. Following recent attacks on Iran by President Donald Trump and Israel, the IMF has revised down its growth forecast for the UK from 1.3% to 0.8% for this year, and from 1.5% to 1.3% for the following year. Moreover, inflation is now expected to average 3.2% in 2026 and 2.4% in 2027, painting a bleak picture for households.
The ongoing cost of living challenges are compounded by surging petrol and diesel prices, along with anticipated increases in energy and food expenses. In addition, the IMF predicts a further rise in unemployment, projecting an increase to 5.6% in 2026 from 4.9% in the previous year.
The escalation of oil and gas prices in recent weeks, fueled by disruptions in energy production and transportation due to attacks on facilities and the blockade of the Strait of Hormuz, has added to the economic strain. Political figures, including Chancellor Rachel Reeves and central bank officials such as the Bank of England’s Andrew Bailey, are currently attending the annual IMF meeting in Washington.
The IMF’s economic counsellor has emphasized the precarious state of the global economy, attributing the darkening outlook to the outbreak of war. The closure of the Strait of Hormuz and damage to critical production facilities in a key region for global energy supply could lead to an unprecedented energy crisis, according to the IMF.
In a severe scenario, the conflict could diminish global growth by 1.3 percentage points in 2026, potentially teetering on the brink of a global recession, as growth rates below 2% have been rare occurrences since 1980. The IMF’s World Economic Outlook underscores the vulnerability of British households to the economic fallout from the Middle East conflict compared to other G7 nations.
As the situation unfolds, the government is urged to cautiously navigate the response to the conflict, ensuring that support measures for households are temporary, targeted, and timely to shield vulnerable families from the economic repercussions without exacerbating inflation or straining public finances.