The ongoing conflict in the Middle East is projected to reduce British households’ spending power by £70.4 billion over the next two years, according to a recent analysis by the Centre for Economics and Business Research (CEBR). The average household will face a combined real-terms loss of approximately £2,400 by 2027, with £1,100 of that occurring in 2026 and a further £1,300 in 2027.

The report highlights that the conflict has triggered a significant energy supply disruption, marking the second major shock in under five years after Russia’s invasion of Ukraine in 2022. Disruptions to shipping routes through the Strait of Hormuz have contributed to higher energy prices, reigniting inflationary pressures just as the UK economy had anticipated some relief from interest-rate cuts.

CEBR estimates that inflation related to the conflict will account for around 32.1% of the decrease in real earnings this year, rising to 44.6% by 2027, excluding demographic effects on aggregate disposable income. The immediate impact is evident in rising costs for household energy, transportation, and essentials. However, the report warns that broader economic consequences are likely, including weakened consumer spending, reduced business investment, and a softer labor market.

Official figures from the Office for National Statistics (ONS) support these findings. Consumer price inflation rose to 2.9% in July, up from 2.6% in June, while CPIH—which includes owner-occupiers’ housing costs—increased to 3.1%. Inflation within housing and household services jumped sharply to 4.1% in July from 2.7% the previous month, driven largely by higher gas prices. Over the past year, gas prices rose 14.7%, and electricity prices increased by 3.6%.

The rise in energy costs is also reflected in recent regulatory changes. The latest Ofgem price cap increase added approximately £221 to the annual energy bill for a typical dual-fuel household, setting the average at £1,862. Another rise of about £60 is expected from October, despite the removal of VAT on electricity which will save around £45. Energy price pressures are forecast to intensify over the winter months, with Cornwall Insight projecting a further 9% increase in the energy price cap during the first quarter of 2027.

Meanwhile, wage growth is slowing, reducing households’ ability to absorb these cost increases. The ONS reported that regular pay growth decelerated to 3.5% in the year through June, with private sector pay growth at 2.8%. Job vacancies also declined to around 707,000 in the three months to July—the lowest outside the pandemic period since 2014.

The CEBR underscores that the erosion in real household spending power—estimated at £31.5 billion this year and £38.9 billion next—will dampen consumer spending throughout 2026 and 2027, potentially slowing broader economic growth.