Fresh hopes of a diplomatic breakthrough in the Middle East have failed to calm global energy markets, as renewed strikes in Iran have pushed oil prices sharply higher.
Brent crude climbed back above $98 a barrel amid fears that the conflict could escalate further, raising concerns about supply disruptions in one of the world’s most strategically important energy regions.
The latest surge in oil prices is already feeding through to the British economy, with retailers warning that rising transport and production costs are beginning to push up prices on shop shelves once again.
Industry data showed shop price inflation accelerating as businesses grapple with the knock-on effects of higher global energy costs, threatening fresh pressure on households already struggling with elevated living expenses.
At the same time, Britain’s record-breaking heatwave is expected to provide a major boost to consumer spending, particularly across hospitality, garden products and home improvement retailers.
Temperatures are forecast to remain well above seasonal averages throughout the week, with parts of England expected to hit 35C.
The hot weather has already delivered an early sales boost for Kingfisher plc, owner of B&Q and Screwfix.
Kingfisher reported a 1.4pc rise in sales during the first three months of the year as consumers spent more on outdoor living, gardening and household improvement projects.
Retail analysts said sustained hot weather could also provide a welcome lift for pubs, restaurants and tourism businesses after a sluggish start to the summer season.
Investors remain caught between optimism over possible diplomatic progress in the Middle East and fears that prolonged instability could keep inflationary pressures elevated globally.
Any sustained rise in crude prices would likely complicate the outlook for central banks, including the Bank of England, which is already balancing weak economic growth against persistent inflation risks.
Markets are now watching closely for signs of whether tensions involving Iran will ease — or whether the latest escalation risks triggering another global energy shock.
Susannah Streeter, chief investment strategist, Wealth Club said:”There’s a spring in the step of the Footsie as hopes are kept alive about the prospects of a resolution to the crisis in the Middle East. There’s a dose of cautious optimism still swirling, but it’s losing its potency after fresh US attacks in Iran.
The limited nature of the military action, targeting missile launch sites and mine-laying boats, may help assuage worries the move could re-ignite hostilities. For now, a ceasefire remains in place, and although it’s clearly fragile, even before these strikes both sides made it clear a deal wasn’t imminent.
So, given the fresh uncertainty, oil prices have headed higher again after a sharp fall over the weekend. Brent crude, the benchmark, is back trading above $98 a barrel as speculation fills the diplomatic void. Even if Iran and the US can get back to the table quickly and negotiate a longer-term deal, it’ll take many months to get supplies flowing freely again from the region, and output will be constrained by the damage to energy facilities.
Already, the inflationary effect of the war is showing up on the shelves here. UK shop price inflation increased 1.2% year-on-year last month, up from 1.0% in April, which had been the slowest growth in four months. Prices are rising more quickly than expected, with an expectation of 1.1% for April. But the insidious effects of higher shipping costs are feeding through. Non-food prices rose 0.5% year-on-year, mainly driven by rising costs for furniture and beauty products. The price of other commodities needed for the manufacture and distribution of goods – from energy to plastics – has shot higher and is likely to continue to force retailers to push up prices in months to come, given there’s only so long they can absorb costs. The headline rate would have been higher, but competition in the grocery sector helped drive down food inflation to the lowest level in a year. With such intense rivalry between supermarket chains, it may help keep a lid on higher prices, which are expected to seep in later this year. It also shows why retailers were so incensed by suggestions of voluntary price caps on essential goods, when already margins are so tight.
The warmest May night on record is likely to prompt a fresh wave of purchases to help keep households cool in the heatwave. Fans, paddling pools, blackout blinds and ice cube trays will have been filling up real and virtual baskets and could help boost sales at household goods retailers. It could help boost sales at DIY firm Kingfisher, the owner of B&Q and Screwfix, as customers are likely to have been giving their gardens a spruce up to prepare for the heatwave. Total sales were up 1.4% for the three months to the 30 April, even though a late start to Spring had an impact on demand. So, there may be hopes a renewed desire for makeovers and summer essentials could keep tills ringing.
The hot bank holiday is likely to have also helped boost the fortunes of bars and pubs with gardens and terraces, as people celebrated hot days off. It also bodes well for staycation bookings. The prospect of higher air fares and disrupted routes is still playing on the minds of holidaymakers, and with Britain basking in the sunshine, it could prompt a raft of bookings for UK destinations this summer.”
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