Families Face New Cost-of-Living Pressure as Oil Prices Hit $105 a Barrel

British households are bracing for a severe winter energy price squeeze after oil prices surged to a four-month high above $105 a barrel.

The jump is another setback for millions of families already under pressure from the cost of living crisis, with Brent crude climbing as high as $105.84 a barrel on Thursday as worsening conflict in the Middle East raised fresh concerns over global oil supplies.

Oil has risen by nearly $10 since the start of the week, while UK natural gas prices have reached their highest level since December 2022.

The sharp increase is expected to be felt quickly by motorists through higher petrol and diesel prices, while also threatening to push up food and household energy bills — deepening fears of a difficult winter for consumers.

A renewed rise in inflation could also put pressure on the Bank of England to lift interest rates in the months ahead, increasing mortgage costs for homeowners and buyers.

Government borrowing costs rose again yesterday as the prospect of higher inflation and interest rates – as well as increased spending and borrowing under Andy Burnham – rattled the bond markets.

The yield on ten-year gilts – a key measure of how much it costs the UK to borrow – surged to a 19-year high above 5.3 per cent .

It came after the UK this week paid a record 5.82 per cent interest on the sale of £4.25billion of 30-year bonds – the highest yield since the Debt Management Office was set up in 1998 to raise funds from investors.

The squeeze on family finances is a major blow to Mr Burnham’s hopes to tackle the spiralling costs facing households.

And the spike in borrowing costs is a headache for Chancellor John Healey ahead of the Budget next month as he struggles to calm jittery bond markets.

UK bond yields are the highest in the G7 and it is feared any misstep in the form of extra spending and more debt could spark a fierce backlash on the markets – sending borrowing costs ever higher.

‘The UK’s poor fiscal position argues in favour of a cautious approach,’ said Andrew Goodwin, chief UK economist at Oxford Economics.

‘The credibility of the current plan to reduce borrowing is relatively weak.’

Inflation is running well above the 2 per cent target at 2.9 per cent with economists warning it could hit 4 per cent next year.

Thomas Pugh, chief economist at consulting firm RSM UK, said: ‘Inflation is now on track to peak at almost 4 per cent next year. For businesses this means higher input costs at a time when the economy is likely to be weakening, putting pressure on margins.

‘For households it means private sector pay growth is likely to turn negative in the second half of the year, creating even more pressure on the cost of living.

‘And last, but not least, for Chancellor Healey, it will mean balancing an even bigger hit to his fiscal headroom against demands to do more on the cost of living.’

The latest rise in oil prices followed US attacks on Iranian tankers and strikes on Saudi Arabia by Iran-backed Houthis in Yemen.

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It came just day after Bank of England governor Andrew Bailey warned the Iran war and extreme weather threaten to ignite another burst of inflation.

He also said that mortgage costs in the UK have already risen faster than in any other country in the G7 ‘with the possible exception of Japan’ – even though the Bank has not raised official rates.

This is because the surge in bond yields has fed through the real economy – pushing up the cost of borrowing for households and businesses alike.

Oil prices have risen more than 30 per cent since the US-Iran war started more than six months ago but the benchmark is well below the high above $126 a barrel reached in late April 2026.

The conflict in the Middle East has disrupted oil flows through the Strait of Hormuz, which previously funnelled around 20 per cent of global supplies but now only hands a fraction of its normal traffic.

Dan Coatsworth, head of markets at AJ Bell, said the rising oil price and subsequent inflation shock ‘has major implications for personal finances, corporate profits and financial markets’.

The latest data from the RAC showed the average price of petrol has increased by 5p a litre in the last week to reach 167.17p, and diesel has risen by the same amount to 188.63p.

The last time unleaded petrol prices were that high was four years ago, according to the motoring group.

Furthermore, experts warned that the latest surge in wholesale prices could feed through into consumer energy bills in the winter.

Ofgem’s energy price cap will rise by 4 per cent in October, and analysts are predicting a bigger hike to the price cap in the new year.

Oxford Economics warned it could rise by another 13 per cent in January – hitting households in the depths of winter.