UK Stagflation Trap|Consumer Confidence at 2-Year Low

Iran Shock Meets UK Economy

UK businesses just reported their strongest expansion in months — the composite PMI hit 52.0 in April, well above the 49.8 forecast. At the same time, consumer confidence fell to its lowest level since October 2023, dropping four points to minus-25 in a single month. Output is rising. Confidence is collapsing. That contradiction only makes sense when you understand what is sitting between them.

The Strait of Hormuz blockade has sent oil prices to levels not seen in decades. Jet fuel, which traded around 85 to 90 dollars per barrel before the US-Israeli conflict with Iran began, has now crossed 150 to 195 dollars. That is not just an energy story. Energy costs flow directly into food production, logistics, retail margins, and household bills. The Food and Drink Federation is forecasting food inflation between nine and ten percent this year. Supermarket bosses from Sainsbury's, Tesco, Asda, and Marks and Spencer have all publicly called on the government to cut energy taxes before the price wave hits shelves.

The fiscal picture compounds the pressure. The UK government borrowed a net 132 billion pounds in the financial year ending March — marginally below the OBR's 132.7 billion forecast, a small win for Chancellor Rachel Reeves. But that baseline is already breaking down. The Iran war is expected to blow a 30 billion pound hole in Reeves's fiscal headroom over the coming year. Inheritance tax receipts hit a record 8.5 billion pounds, and capital gains tax revenue surged 62 percent — one-time windfalls that cannot be replicated. The underlying picture is a government that hit its borrowing target in the last quarter of the old rules, and now faces a structurally more expensive energy environment that was not in any OBR model three months ago.

The mechanism is not exotic. Higher oil prices raise the cost of producing and distributing everything. Businesses pass costs forward. Workers see real wages erode. Confidence drops. The GfK survey showed Brits' view of the country's economic trajectory over the past year fell eight points in a single month, to minus-51. The savings index was the one measure that rose — up five points to 32 — which means households are hoarding cash rather than spending. For an economy where consumer spending drives growth, a rising savings rate in response to cost fear is a demand withdrawal, not a buffer.

The Summer Holiday Equation

The consumer confidence number has a second, more immediate cause — and it lands squarely on the one thing Britons plan months in advance. The IEA's chief Fatih Birol has warned that Europe has approximately six weeks of jet fuel supply on hand. If Hormuz remains blocked, that runway ends before the summer travel season peaks.

Lufthansa has already cut 20,000 European short-haul flights. Aer Lingus has cancelled transatlantic, European, and domestic routes, affecting services to Seattle, San Francisco, Berlin, Zurich, Athens, and multiple UK cities. Over 30 airlines globally have either cancelled flights or added fuel surcharges. United Airlines has flagged fares may rise by as much as 20 percent. Air France-KLM is adding 50 euros per round-trip on long-haul fares. American Airlines says the jet fuel surge will cost it an additional 4 billion dollars this year, turning a near-2-billion-dollar profit forecast into a potential loss.

For UK consumers, this is not an abstract geopolitical story — it is the summer holiday. The GfK survey showed personal financial sentiment fell across both backward-looking and forward-looking measures. Susannah Streeter at Wealth Club made the link directly: consumers are bracing for an impending jet fuel shortage that could cancel summer holidays. Retailers are already seeing shoppers pull back from non-essential spending in anticipation. The BRC's Helen Dickinson said regulation and energy costs are weighing on retailers' ability to invest, and that government has yet to formally respond to the supermarket industry's demands for energy cost relief, despite a meeting with Chancellor Reeves earlier this month.

The energy policy debate has sharpened as a result. At BP's annual general meeting, more than 50 percent of shareholders voted against the company's plans to scrap existing climate reporting — a direct rebuke of BP's decision to abandon its net-zero commitments. Opposition leader Kemi Badenoch publicly demanded Starmer accelerate North Sea oil and gas production at Prime Minister's Questions. Starmer called an emergency COBRA meeting, having previously said the government cannot solve the crisis alone. The political pressure is real, but North Sea acceleration takes years, not weeks.

What the Bank Numbers Reveal

Next week's FTSE 100 bank earnings season will provide the first hard read on how much of this stress has entered the credit system. Barclays reports Tuesday, followed by Lloyds on Wednesday, Standard Chartered on Thursday, and NatWest on Friday. Combined pre-tax profit across the five major lenders is forecast at just under 16 billion pounds — marginally ahead of 15.2 billion a year ago, but well below the near-17 billion from 2024, when rates were still rising.

The number to watch is not the headline profit. It is loan loss provisions. Analysts are forecasting 2.6 billion pounds in combined impairment charges across the quintet — the highest first-quarter provisioning since the start of the COVID-19 pandemic in 2020. In the first quarter of 2022, after Russia's invasion of Ukraine sent inflation up seven percent, HSBC recorded a 642 million dollar impairment charge and profit fell 25 percent. Lloyds saw profit drop from 1.9 billion to 1.6 billion in the same quarter. The parallel is imperfect — this shock is energy-led, not sanctions-led — but the transmission mechanism through credit quality is similar.

The weight of evidence currently points toward a UK stagflation scenario deepening through Q2. Consumer confidence is at a two-year low, food inflation forecasts are rising to double digits, airlines are cutting capacity before summer, and fiscal headroom is narrowing faster than the OBR's March projections assumed. That reading holds as long as Hormuz remains effectively blocked and the government's energy tax relief demands from supermarkets go unanswered. If the Strait of Hormuz reopens — even partially — jet fuel prices could fall sharply within weeks, as they did when the Suez disruption eased in early 2024, and a summer travel season that survived intact would provide a meaningful demand floor. The verification benchmark is the IEA's six-week supply clock: if jet fuel inventories are not restocked by mid-May, the flight cancellation wave accelerates. The second check is Thursday's loan provisions from Barclays — if impairment charges exceed the 2.6 billion consensus, credit conditions are tightening faster than markets have priced.