The UK economy could face a “very significant” hit from the conflict in Iran, the official budget watchdog has warned.
The Office for Budget Responsibility (OBR) said the inflation outlook would be “particularly uncertain” following increases in gas and oil prices in recent days following attacks in the Middle East.
It came as the budget watchdog cut its inflation forecast for this year, indicating UK inflation will fall to target levels faster than expected.
The OBR also cut its economic growth forecast for this year and revealed a worsening unemployment outlook for the next three years.
However, in its latest projections alongside the Chancellor's spring statement, the organization highlighted that recent volatility in the Middle East could have an impact on several of its projections.
The forecasts were prepared ahead of days of recent attacks as part of an intensifying conflict between US-Israeli forces and Iran.
On Tuesday, the OBR said: “The conflict in the Middle East, which escalated while we were finalizing this document, could have very significant impacts on the UK and global economies.”
David Miles, of the OBR's budget responsibility committee, said his predictions that inflation will fall to target levels early this year have become more uncertain after jumps in oil and gas prices linked to recent attacks in the Middle East.
He said: “I think what will happen with inflation is particularly uncertain in recent days.
“Our central expectation was that inflation would fall back towards the Bank of England's 2% target at the beginning of this year and would be around that level by the end of the year.
“There should be more uncertainty around that right now.”
Cut inflation projections indicated it will slow to 2.3% by 2026, down from a previous forecast of 2.5%.
Experts said the lower-than-expected rate is partly due to “greater slack in the economy” and falling food and energy prices.
As a result, the OBR said inflation will fall to the 2% target rate set by the Bank of England and the Government by the end of this year.
The Bank has already suggested that inflation – the rate at which the price of goods and services rises – could fall below 2% in April.
The OBR said inflation is expected to remain at the 2% target from 2027, assuming this is not derailed by the potential rise in energy costs.
It came as Chancellor Rachel Reeves told MPs in Parliament that the OBR said the UK economy would grow more slowly than expected in 2026, although growth would recover in subsequent years.
The UK's gross domestic product (GDP) is expected to grow by 1.1% in 2026, as the OBR cut its previous prediction from 1.4% last November.
The budget watchdog said the downgrade was linked to a slowdown in growth late last year, a easing of the labor market and weak data from recent business surveys.
However, it also raised its growth forecasts for both 2027 and 2028, with the economy set to expand 1.6% in both years.
The Chancellor said she had the “right economic plan” for the UK when she delivered her spring statement on Tuesday.
Ms Reeves also said unemployment will “peak later this year” before declining in subsequent years.
The OBR said the UK unemployment rate is on track to peak at around 5.33% in 2026.
The latest data from the Office for National Statistics (ONS) showed unemployment rose to a five-year high of 5.2% in the three months to December.
The OBR had previously predicted the unemployment rate would rise to 4.9% in 2026.
New forecasts show that unemployment is on track to reach 4.9% in 2027 and 4.4% in 2028.
It had previously forecast it would be 4.6% in 2027 and 4.3% the following year.
The new forecasts have also reduced the Government's debt projections for each year until 2031, in a potential boost for the Chancellor.
The reduction in borrowing costs, linked to a reduction in government bond yields, also meant that the Government's room to meet its fiscal rules widened to £23.6 billion, compared with £21.7 billion in the November budget.
Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, said: “There were few major surprises in today's spring statement, with the Chancellor delivering the well-marked 'boring budget' that we and the market expected.”
He added: “Parts of the fiscal forecasts now appear outdated due to the rapid escalation of events in the Middle East.”
Peter Arnold, chief economist at EY UK, said: “The underlying improvement in the UK’s fiscal position was supported by higher actual and expected tax revenues, driven largely by stronger stock market performance since November.
“There may now be questions about how long this stock market performance can be sustained if the conflict in the Middle East drags on and global stock market volatility continues.”
