Why are energy bills going up and petrol still expensive despite the Iran deal?

A new prime minister soon – and Andy Burnham asks the nation to imagine “good growth in every postcode and hope in every heart”. A nice vibe, but many households and businesses would settle for a more immediate reduction in energy bills and petrol, as a downpayment on the possible future success of Manchesterism. Yet gas and electricity costs go up again on Wednesday and will remain higher until at least October…

In a word: Iran. Since it started brewing in February, the war there has panicked markets and obviously disrupted the supply of gas, oil and other commodities, including for fertilisers and drugs. Because there is a lag between wholesale and future prices rising and them making their way into the bills paid by businesses, the effects have taken some weeks to reach bill-payers. In the case of households, the lag is even longer because prices are capped by regulator Ofgem on a quarterly basis; this is the first opportunity for them to feel the cost of the war launched by Benjamin Netanyahu and Donald Trump.

£221 for the average household’s combined mains gas and electricity bills (fuel oil and bottled gas are regulated differently). That is an increase of 13 per cent, to an annual equivalent of £1,862. It’s also a good 80 per cent more than where things stood before the successive energy crises caused by the wars in Ukraine and the Gulf.

If the US-Iran interim peace deal – the Memorandum of Understanding – holds and results in a full agreement, then supplies will increase and wholesale and future market pricing will adjust downwards accordingly, albeit not smoothly. If the war restarts, or escalates, the future looks rather more gloomy. It could well be the difference between a global recession or mild recovery in economic growth in 2027.

It would help the new prime minister greatly. The cost of living crisis would ease correspondingly and the rate of inflation would certainly fall during 2027 as price increases experienced in the first half of this year drop out of the calculations. After that, the Bank of England should be able to resume its programme of modest cuts in interest rates, and the small economic growth seen at the start of 2026 should come back, softening pressure on the public finances. All of which would be great timing for Andy Burnham, and a disappointment for Sir Keir Starmer and Rachel Reeves, who laid the groundwork.

“Up like a rocket, down like a feather” was the old saying about pump prices, but nowadays the response to lower wholesale costs feels quicker. According to the RAC, the price of petrol hit an Iran war peak of 159.53p a litre on 28 May, while diesel’s highest price during the conflict was 191.54p a litre on 15 April; by Friday 26 June, the average price was back to 151.98p for petrol and 168.84p for diesel.

There is also greater transparency these days through pump price tracker apps, and the Competition and Markets Authority is known to be keeping an eye on trends, which adds to the downward pressure.

A golden scenario for Burnham – if he dares to dream – would be for the Iran war to end, closely followed by the conflict in Ukraine. In such circumstances, many world commodity prices would quickly tumble, with an immediate terms-of-trade benefit for importing nations such as the UK. Inflation down, interest rates cut, consumer and business confidence boosted, and, given he maintains the fiscal rules, higher tax revenues and lower borrowing costs. If he can cling on until 2028, Burnham might be enjoying an unlikely lead in the polls and a chaotic, divided muddle of parties to his right. For Labour, the darkest hours may have come before the dawn of Burnham.