The price of oil has surged to $105 a barrel as escalating conflict in the Middle East fuels concerns that the crisis will not be quickly resolved, potentially accelerating inflation.

The intensification of conflict between the US and Iran in the Gulf region in recent days has led to a sharp increase in the costs of both crude oil and natural gas. Brent crude surpassed $100 a barrel on Wednesday and has continued its upward trajectory.

The ongoing conflict has resulted in the effective closure of the Strait of Hormuz, a critical chokepoint for global oil and gas supplies originating from the Gulf. Further exacerbating these concerns, Iran-aligned Houthi forces were reportedly responsible for seizing Yemen's port of Mocha, a key location on the Red Sea. This development raises the possibility of additional disruptions to shipping routes.

Concerns about potentially higher inflation have, in turn, contributed to pushing bond yields in the UK to their highest levels in decades. President Trump, speaking at a Republican Party convention, suggested that the fighting might not conclude until after the US mid-term elections in November.

The price of natural gas has also seen significant increases in wholesale markets. In the UK, gas prices exceeded 200 pence per therm for the first time since late 2022. European storage levels are notably lower than usual for this time of year, and the urgent need to replenish reserves before winter has further driven up prices.

While UK consumers are currently shielded from immediate wholesale gas price spikes by Ofgem's price cap, prolonged high prices could still lead to steeper bills. The existing cap is scheduled for a 3.6% increase in October, with another adjustment expected in January.

The rise in energy costs has amplified fears of a surge in inflation, which has also exerted upward pressure on government bond yields globally. In the UK, yields on 10-year bonds reached their highest point since 2007 on Thursday, while 20- and 30-year bond yields were at levels not observed since 1998. This trend indicates a higher cost of borrowing for the government, at a time when public finances are already under strain.

Furthermore, these increased borrowing costs could directly impact households by affecting interest rates for certain financial products, such as fixed-rate mortgages.