Britain faces outsized vulnerability to a fresh jump in energy prices tied to recent tensions in the Middle East, even as the country had appeared to be moving past a prolonged period of high inflation. Government borrowing costs in the UK have climbed further than those in much of Europe and the United States, and financial markets have pared back expectations that the Bank of England will cut interest rates this year.
Why British gas prices have spiked
Wholesale gas in Britain has surged roughly 70% over the past week after energy shipments were disrupted through the Strait of Hormuz and Qatar - responsible for about one-fifth of global liquefied natural gas (LNG) - halted production. Britain imports only about 1% of its gas directly from Qatar, but the interruption has pushed gas costs higher around the world and driven up domestic wholesale prices.
Gas is a dominant price setter for electricity, and roughly 30% of Britain’s power generation comes from gas-fired plants - compared with 17% in Germany and 3% in France. Gas is also the main source of heating in more than 70% of UK homes. Because electricity prices are commonly set by the marginal cost of gas-fired generation, higher gas prices flow through to power costs even when renewable sources supply a substantial share of overall generation.
Storage limitations amplify exposure
Britain’s capacity to hold gas on reserve is modest relative to major continental peers. UK storage sites can contain about 12 days’ worth of demand, versus roughly 90 days for Germany and more than 100 days for France. Unlike the European Union, Britain does not operate under a gas storage target established after the energy shocks tied to Russia’s full-scale invasion of Ukraine in 2022.
About half of the nation’s storage volume is linked to an offshore facility off northern England owned by utility Centrica. That site’s operations were paused last year after running the site became uneconomical. Centrica has indicated it is seeking government support to make the facility viable again.
Timing of household bill changes
Household energy bills will not rise immediately because Ofgem, the UK energy regulator, sets the price cap on a quarterly basis. A scheduled drop in April is expected after the government shifted some levies onto general taxation. However, the regulator’s observation window for the price cap that will apply from July 1 runs from February 18 to May 18 and therefore will capture the current wholesale surge. Some analysts are forecasting about a 10% increase in the cap.
For businesses, many contracts are likely hedged, offering short-term protection against the spike in wholesale costs.
Inflation and growth implications
Forecasters note that headline inflation effects may be somewhat larger in the euro zone than in the UK because fuel and utilities make up a smaller share of Britain’s official inflation basket. Oxford Economics estimates that if shipments through the Strait of Hormuz are disrupted for up to two months, UK headline inflation could be about 0.4 percentage points higher, compared with a 0.5 percentage point rise in the euro zone.
But the UK’s more gradual return from elevated inflation levels leaves it vulnerable to prolonged spikes becoming more entrenched. After peaking at 11.1% in 2022, UK inflation had eased to 3% in January, while the euro zone’s rate stood at 1.7% in the same month. Long-term inflation expectations among the British public remain higher than before the Ukraine conflict, which raises the risk that sustained energy-driven price pressure could feed through into wages and broader price-setting.
Analysts warn that continued upward pressure on prices could weigh on economic growth as households face the squeeze of faster inflation.
Policy trade-offs and fiscal exposure
It is not yet clear how the UK government and the Bank of England will respond if the energy-driven price shock persists. Absent a quick reversion in wholesale energy costs, policymakers will face competing pressures. The previous Conservative administration deployed roughly 44 billion pounds across 2022 and 2023 to shield households and businesses from a Ukraine-linked rise in energy prices. Deploying a comparable package again would complicate current fiscal repair plans set by finance minister Rachel Reeves and could rekindle tensions in the gilt market.
The Bank of England is likely to slow the pace of planned interest rate cuts as it assesses the duration of the current energy-price shock. Market pricing now treats a quarter-point cut this year as roughly a coin-flip, whereas last week markets fully priced two cuts in 2026.
($1 = 0.7504 pounds)