Donald Trump's war in the Middle East has left Britain on the brink of a new cost of living crisis as petrol, energy and mortgage bills rise.

As oil prices soared close to $120 (£95) a barrel yesterday – before later slipping back below $90 – fears grew that beleaguered British households will pay a hefty price for the US President's military campaign.

A barrel sat at around $90 today in volatile overnight trading. 

The cost of filling up a car has already rocketed over the past week. And with gas prices surging too, experts said annual energy bills could top £2,000 by the summer.

Mortgage lenders scrambled to pull their best deals yesterday in what could become a 'snowball' effect, piling more pain onto borrowers.

Mr Trump has shrugged off the surge in oil prices as a 'very small price to pay' and insisted that 'only fools would think differently'.

But as market turmoil deepened yesterday, it became clear UK households will be feeling the pain in their pocket – fuelling recession fears.

In a rare Commons address, Chancellor Rachel Reeves said the crisis is 'likely to put upward pressure on inflation', with experts predicting it could climb as high as 5 per cent.

Prime Minister Keir Starmer said: 'The longer this goes on, the more likely the potential for an impact on our economy, impact into the lives and households of everybody and every business.' 

The prospect of higher inflation has shattered hopes of any Bank of England interest rate cut this year and increased the chance rates may even go up. It also deals a body blow to Labour's attempt to revive its fortunes by focusing relentlessly on the cost of living.

In her Spring Statement on the economy last week, the Chancellor told MPs she would finally get inflation under control this year and pledged to cut families' fuel bills. Both now look likely to rise.

Government borrowing costs have also risen sharply, raising the prospect of more tax hikes. And Ms Reeves is resisting pressure to increase defence spending, despite criticism of Britain's military response to the crisis.

The Chancellor told MPs further increases to the defence budget would not be made until a spending review due in the summer of next year. Ms Reeves also came under fire from the Tories yesterday for resisting calls to scrap a rise in fuel duty this year. And Shadow Chancellor Mel Stride accused her of 'gross mismanagement' of the economy for letting inflation and borrowing spiral.

Susannah Streeter, at investment platform Wealth Club, said: 'Consumers are paying the price for the audacious attack by the US and Israel on Iran.'

Sanjay Raja, UK economist at Deutsche Bank, said: 'This certainly feels like another wave in the ongoing cost of living crisis.'

Martin Beck, chief economist at consultancy WPI Strategy, warned that the economy 'could stagnate or even slip into recession'.

The attack on Iran stunned markets and sent gas and oil prices soaring last week.

The war has effectively shut the Strait of Hormuz, the sea lane through which one-fifth of the world's oil passes. It has prompted some Gulf states to stop pumping as they run out of storage capacity. Gas facilities are also disrupted.

Last night Mr Trump told reporters he 'will not allow a terrorist regime to hold the world hostage and attempt to stop the globe's oil supply, and if Iran does anything to do that, they'll get hit at a much, much harder level'.

He said the Strait of Hormuz is 'going to remain safe'. Iranian attacks have left tankers reluctant to sail through the strait.

The latest developments sent the price of Brent crude spiralling to as much as $119.50 a barrel. But amid volatile trading it later slipped below $90. It was the first time oil has topped $100 since 2022, after Russia invaded Ukraine. Analysts at Goldman Sachs said the scale of disruption to oil supply now is 17 times bigger than back then.

Meanwhile, European gas prices surged to $170 per therm – a unit of heat energy – more than double their level before the war began.

The RAC said petrol prices were already up 5p a litre and diesel had climbed by 9p since the crisis began.

Household energy bills are capped until the end of June, but then a new cap will apply taking in the latest price movements. Deutsche Bank predicted it could mean annual bills above £2,000, wiping out reforms by the Chancellor to bring them down.

Rising government borrowing costs could wipe out as much as £10billion of Ms Reeves' £24billion 'headroom'.