The conflict in Iran is expected to drive 200,000 more households into poverty, top economists have cautioned.
Increasing energy bills, fuel prices, and food costs will all strain family budgets, according to the National Institute of Economic and Social Research (Niesr).
Meanwhile, an economic slowdown will weaken wage growth and lead to a rise in unemployment, reducing incomes and worsening living standards throughout the economy, especially for the poorest households.
“The new energy price shock caused by the conflict in the Middle East brings attention to existing vulnerabilities. Those in the lower half of the income distribution will see their incomes decrease due to reduced economic activity and higher unemployment,” said Adrian Pabst, an economist.
“Moreover, lower-income households generally spend a larger portion of their budget on energy and food, so rising energy costs and food inflation will diminish their living standards beyond the impact of the shock on their incomes.
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“The combined effect will push at least 200,000 additional households into absolute poverty unless the government provides targeted support.”
This would add to the five million who are already estimated to live on incomes below £1,500 per month after accounting for housing costs, putting them below 60% of the median income in 2023-24, which is Niesr’s definition of poverty.
About 100,000 of the additional impoverished households will have only between £500 and £1,000 to spend each month.
Inflation surged to 3.3% in March due to rising fuel prices, and economists expect it to rise above 4% even if there is a rapid resolution to the Iran conflict.
If the Strait of Hormuz remains blocked for a longer period, the UK would face a recession and inflation above 5%, Niesr predicted. In this scenario, unemployment could increase from 4.9% in February to a peak of 5.8%, a level not seen since 2014.
Mr. Pabst suggested an option to mitigate the impact on poorer households could be to offer a £10 per week boost to Universal Credit for six months.
This policy would replicate the £20 boost temporarily offered during the pandemic, at a cost of around £2 billion to the taxpayers.
Niesr’s forecasts for the impact on family finances only cover the 2026-27 financial year. Mr. Pabst and his colleagues expect the situation to worsen in the subsequent two to three years as the longer-term economic consequences of the conflict continue to impact family finances.
Figures from the Bank of England indicated that living costs were already rising faster than average post-tax incomes even before the conflict, amid a slowdown in wage increases.
Deputy Editor & UK News
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