Many households are feeling the squeeze as petrol prices climb, energy bills remain high and mortgage rates continue to rise. The sharp increases have left many people wondering why costs are climbing across so many areas at once – and whether relief could arrive anytime soon.
According to Dr Danilo Spinola, senior lecturer in economics at Birmingham City University, the surge in prices is largely being driven by global events that are disrupting key supply routes and pushing up the cost of essential commodities such as oil. Dr Spinola says the latest spike has been triggered by what economists call ‘external shocks’ – events outside the domestic economy that ripple through global markets.
“The problem right now comes from external shocks,” he explained. “The war in Iran has created a big issue in terms of global energy choke points.”
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A major concern is the Strait of Hormuz, a crucial shipping route through which roughly 20% of the world’s oil and large volumes of fertiliser pass. Dr Spinola said “When this route closed because of the conflict, the supply of oil around the world was reduced. That pushed oil prices up significantly.”
Because oil underpins much of the global economy, rising prices quickly spread into other sectors. He said “We use oil for basically everything. When oil prices rise, it affects gas prices, transportation, shipping costs and food production. Fertiliser is also affected, which means agriculture becomes more expensive.”
The result is broader inflation, meaning the cost of everyday goods and services rises across the board, writes Ella Walker from PA.
Why mortgage rates are rising too
The knock-on effects of rising inflation also influence interest rates, which in turn affect mortgages and borrowing costs. “Increasing interest rates is the main tool central banks have to tackle inflation,” Dr Spinola explained.
By raising interest rates, the Bank of England makes borrowing more expensive, which can reduce spending and help slow down price increases. However, financial markets often react before official rate changes happen.
He said “There is always a lag between what the central bank decides and what people experience in everyday life. Markets try to anticipate what the Bank of England will do next. Those expectations alone can push up interest rates.”
Because mortgage pricing is closely linked to these expectations, lenders may increase mortgage rates even before the central bank moves. “When uncertainty rises and inflation expectations increase, mortgage lenders start charging higher rates,” Dr Spinola added.
Would prices fall if the conflict ended?
While an end to the conflict could ease some of the pressure on markets, prices may not quickly return to previous levels. Dr Spinola said “Usually what we see is that prices don’t go down – the rate of inflation falls. That means prices stop rising as quickly, but they don’t necessarily return to what they were before.”
If tensions ease and major shipping routes reopen, financial markets could calm, which may help lower interest rates over time. He said “Expectations would improve and interest rates could begin to fall. But part of the inflation is already embedded in the economy.”
How households can protect their finances
During periods of economic uncertainty, experts recommend taking a cautious approach to spending. “In situations like this, it’s important to be careful with finances,” Dr Spinola said.
He suggests reducing unnecessary spending where possible and prioritising saving to build a financial buffer. “If you already have debt, higher interest rates mean repayments could increase,” he warned.
The economist also advises delaying major financial commitments until conditions become more stable. “If you’re planning to buy a car or move house, it might be wise to postpone it until the situation becomes clearer.”
Is the situation as serious as it seems?
Despite the current pressures, Dr Spinola said similar economic shocks have happened many times before – and economies have recovered. “It’s not the end of the world,” he said.
“If we look back 50 or 60 years, there have been many similar shocks.” He pointed to the oil crisis of the 1970s, the dotcom crash of the early 2000s and the global financial crisis in 2008 as examples of major economic disruptions.
More recently, the world has faced the Covid-19 pandemic, the cost of living crisis and the war in Ukraine. “History shows that economies do recover,” he said. “I don’t think this situation will be worse than some of the crises we’ve already faced.”