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The outbreak of hostilities between the United States, Israel and Iran has sent shockwaves through global energy markets, reigniting inflation fears and forcing central bankers onto the back foot. Here, we assess what this means for UK investors navigating an increasingly complex macroeconomic environment.
On 28 February 2026, United States and Israeli forces launched coordinated military strikes against Iran, killing Supreme Leader Ali Hosseini Khamenei and targeting key military and nuclear infrastructure. Tehran responded swiftly, unleashing missile attacks across Gulf states, including Qatar's liquefied natural gas (LNG) export capacity and regional US military installations in a rapid escalation that has since dominated global risk sentiment. The practical closure of the Strait of Hormuz — through which approximately 20% of the world’s oil and liquefied natural gas transits daily — has precipitated what the International Energy Agency has characterised as the largest supply disruption in the history of the global oil market. For investors, this is not a distant geopolitical event: it is a direct and material input into growth, inflation and asset price dynamics across developed economies, including the United Kingdom.
Brent crude surged by approximately 15% in the immediate aftermath of the strikes before climbing further to around $120 per barrel as the conflict deepened and the market began pricing in sustained disruption. Global oil prices are now more than 25% above pre-conflict levels, with some analysts declining to rule out a move towards $150 in a prolonged scenario. The suspension of roughly one-fifth of global crude and natural gas supply has reintroduced a degree of energy price volatility not seen since Russia’s invasion of Ukraine. For UK consumers and businesses, the transmission mechanism is direct: pump prices, household energy bills, higher mortgage rates and industrial input costs are all moving sharply higher. Ofgem’s energy price cap faces renewed upward pressure, and analysts anticipate a material increase in household gas bills during the second half of 2026. The UK’s structural position as a net energy importer places it firmly on the more exposed end of this supply shock.
The inflationary pass-through from an oil price shock of this magnitude is well-documented. The IMF estimates that every 10% increase in oil prices adds approximately 0.4% to consumer price inflation while subtracting 0.15% from GDP growth — a relationship now operating against the UK at considerable scale. The Bank of England’s preliminary estimates suggest CPI will run between 3% and 3.5% across the second and third quarters of 2026, meaningfully above the 2% target the MPC had been tracking towards before the conflict erupted. GDP growth forecasts for the UK in 2026 have been revised sharply lower to a range of 0.4%–0.7%, as higher energy costs erode household disposable income and compress business margins. The spectre of stagflation — persistent inflation coinciding with stagnant or weakening growth — has returned.
The Monetary Policy Committee (MPC) finds itself in a deeply uncomfortable position. Having held interest rates at 3.75% at its March meeting — abandoning what had been a broadly anticipated cut — the MPC has been forced to reassess a well-signalled easing path that markets had largely priced in. The Committee faces a textbook stagflationary dilemma: cutting rates to support an economy that is clearly losing momentum risks entrenching an inflation overshoot and undermining sterling; holding or tightening further to contain price pressures risks accelerating the very downturn it seeks to mitigate. Rate hikes, once considered a remote possibility for 2026, have re-entered the conversation. Governor Bailey and colleagues will be monitoring energy futures, wage settlement data and inflation expectations surveys with unusual intensity in the months ahead. Any evidence of second-round inflationary effects embedded in pay bargaining would materially raise the probability of further tightening and extend the period of policy-driven uncertainty for businesses and households.
Global equity markets have repriced the conflict through a combination of risk aversion and pronounced sector rotation. The FTSE 100, having initially surrendered its 2026 year-to-date gains, has demonstrated notable resilience relative to European peers, reflecting the index’s distinctive composition: meaningful defensive exposure across pharmaceuticals, utilities, tobacco and consumer staples, alongside significant weightings in energy majors and defence contractors. BAE Systems, Rolls-Royce, Babcock International and Melrose have attracted renewed institutional interest as defence procurement accelerates across NATO allies, while energy majors and mining stocks have benefited from commodity price tailwinds. However, the sharp rise in UK gilt yields — as markets reprice a higher interest rate and inflation outlook — has weighed on rate-sensitive sectors, including real estate and domestically focused financials.
The Iran conflict represents a significant geopolitical supply shock to global energy, and its consequences for UK investors are multi-layered and still evolving. The key variables to monitor in the near term include the operational status of the Strait of Hormuz, the trajectory of Brent crude, MPC communications on the growth and inflation outlook, domestic wage settlement data, and any diplomatic signals that might alter the conflict’s duration or intensity. We counsel against reactive repositioning; the most durable investment decisions during periods of geopolitical stress remain those anchored to long-term fundamentals rather than short-term sentiment.
Article credited to Alex Brandreth of Luna Investment Management
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