OBR warns inflation could exceed three per cent if Iran crisis continues
Inflation is set to jump back up above three per cent if the rise in oil prices is sustained, a government watchdog has warned, amid fears the energy crisis in the Middle East could drag on.
The Office for Budget Responsibility (OBR)’s David Miles said the current rise in oil and gas prices would add around a single percentage point to price growth, keeping CPI inflation above three per cent at the end of this year.
This calculation is made even after oil prices fell back from an initial surge on Monday, with prices still remaining around 20 per cent higher than before President Trump and Israel’s Prime Minister Netanyahu launched strikes on Iran.
Miles said the risks were milder than seen during the Ukraine war though he said forecasts were prone to change as events in the war develop.
“I would have given you a different answer yesterday morning,” Miles said.
Rachel Reeves emphasised earlier on Tuesday that the government’s response focused on urging parties involved to de-escalate the conflict.
She also sent a direct warning to energy providers and companies running petrol stations that regulators would tackle price gouging, whereby prices are raised to unfair levels during times of crisis.
“Some companies are using this crisis to rip off consumers,” Reeves told MPs.
She said on Monday that the oil price shock was “likely” to result in higher prices for Britons.
Inflation warning
The energy price shock could leave public finances on shakier ground, with the OBR suggesting that Reeves already faced a spending gap.
Tom Josephs, another member of the OBR board, said Reeves would be tasked with finding an extra £13bn by 2029 to ensure departments including justice and energy did not suffer real terms cuts..
He was asked by Tory MP John Glen on whether the government could afford real terms increases in spending across all departments after 2029 during a Treasury Committee Hearing.
Josephs confirmed government departments would face a 4.4 per cent cut to expenditure between 2029 – the year of the next General Election – and 2031 if Reeves were to fulfill Labour commitments on special educational needs and disabilities (SEND), defence spending and international aid.
“In order to achieve the fall in borrowing that the government has set out and get debt on the broadly stable path does require spending to be broadly stable as a share of GDP,” Josephs said.
“That’s what you need to do to get the public finances on a fairly sustainable path.
“That will require the government to make choices when it comes to spending reviews around either some pretty tough prioritisation or finding ways to drive greater efficiency.”
Reeves battles against Tories on spending plans
Glen also asked chief secretary to the Treasury James Murray the same question earlier on Tuesday in Parliament.
Reeves’ deputy appeared to suggest that the government would deliver efficiency savings.
Shadow minister Richard Fuller later pressed Murray on the same point, suggesting that the plans seemed “iffy” and depended on positive forecast updates and resisting spending pressures.
Murray answered: “If [Fuller] was honest, and remembered his time in Liz Truss’ government, he might not have the gall to make comments like that.”
The exchange of words between Labour and Conservatives on managing the UK economy are set to intensify closer to the Budget.
Reeves has said the next Spending Review will come in 2027, suggesting that she may want to cover the £13bn shortfall by the end of this year.
At the last Review, departments to suffer real terms cuts included the Home Office, the Foreign Office and the Treasury.
Labour ministers are already under considerable pressure to put plans forward on defence spending, with the OBR warning that the government is falling behind a “linear” increase in expenditure to get funding to hit three per cent of GDP by 2030.