Middle East conflict impact apparent! UK energy price cap jumps 13% Bank of England is in a dilemma.

Due to the Iran war pushing up natural gas and electricity wholesale costs, British households will face the biggest energy bill hike since 2023, further exacerbating inflationary pressures and dragging down the overall economy. The UK energy market regulator Ofgem announced on Wednesday that the energy price cap will increase by 13% to 1,862 (approximately $2,505) from July 1. The summer price hike breaks tradition, and household bills in October may increase again. The price cap sets the maximum rates that energy suppliers can charge to household users, adjusted quarterly. The previous price cap was based on market data before the escalation of tensions in the Middle East, and this increase is the first to fully reflect the impact of the unrest in the Middle East. Since the outbreak of the Iran war earlier this year, European energy market prices have surged, with disruptions in oil and gas transport in the Strait of Hormuz causing market concerns. Since the conflict began, the one-month natural gas futures prices in the UK have risen by more than 40%, while electricity futures prices have also increased by nearly one-third. British energy bills are rising at the fastest rate since 2023. In previous years, energy demand typically decreases in the summer, leading to a decrease in the price cap. This summer's price hike is unusual. The energy consultancy firm Cornwall Insight Limited predicts that energy bills will increase again in October. The company warns that even if the conflict ends quickly, electricity prices are unlikely to return to the levels seen in April due to damaged infrastructure and ongoing disruptions in energy supply. Craig Lowry, Chief Adviser at Cornwall Insight, said, "The summer price increase has put pressure on residents, but the bigger concern is in October, when household energy demand will increase." The agency initially predicts that the energy price cap in October will increase by another 2% to 1,899. Intensifying inflation and weak economy put the Bank of England in a dilemma. The soaring energy costs have fundamentally changed the inflation outlook facing the Bank of England, reminiscent of the energy shock triggered by the Russia-Ukraine conflict. Before the Iran conflict erupted, the Bank of England had expected inflation to gradually fall back to the target value of 2% in the spring of this year, allowing it to further lower interest rates. Now, even in more optimistic scenarios, the Bank of England expects inflation to almost double the target level later this year. Due to the rise in fuel prices, the UK's April inflation rate has remained high at 2.8%. The increase in energy prices has forced the Bank of England to shelve plans to cut interest rates. Several Bank of England officials have recently warned that it is not ruled out that interest rates may have to be raised as the conflict continues. Currently, the Bank of England is weighing whether the soft labor market and sluggish economy can offset the risk of a new spiral of price increases caused by rising energy prices. UK Energy Minister Ed Miliband said in a statement, "The conflict that we did not desire has pushed up the energy price cap, which is undoubtedly bad news for all households." The UK government is developing plans to provide targeted support to the public in the second half of the year to alleviate the burden of household energy costs. Miliband said on Wednesday that the government will "prepare for everything before winter arrives." Despite a recent decrease in energy price caps, the scale of overdue energy bills for residents continues to increase due to broader cost of living pressures, making it difficult for many households to pay on time. The UK Energy Association estimates that the amount owed could reach 7 billion by the end of 2026. Meanwhile, the prospects for economic growth in the UK have weakened. Surveys show that economists expect the UK economy to grow by 0.7% in 2026 and 1.2% in 2027. Both figures are lower than previous forecasts. Furthermore, political instability may cast a shadow over the UK economy. In local elections earlier this month, the ruling Labour Party led by Prime Minister Starmer suffered a major setback, with a large number of party members publicly calling for Starmer to resign after the election defeat. Overall, the Bank of England is at a crossroads of policy of "cannot loosen, cannot tighten": inflation is not completely tamed, signs of growth collapse are emerging, and geopolitical risks have narrowed the room for policy maneuver. It is reported that the Bank of England will announce its interest rate decision on June 18. The market currently expects the Bank of England to keep the base rate unchanged at 3.75%.