As strategies go, waiting and hoping can be commendable.

Panic can be expensive, particularly when governments succumb and dish out billions of pounds with little forethought.

Rachel Reeves and Sir Keir Starmer have their fingers crossed that the war in Iran will be over soon and the world can get back to normal before they feel compelled to offer vast subsidies to hold down energy bills.

“The most important thing we can do to address the cost of living challenges people face is to de-escalate the conflict in the Middle East,” the Chancellor said this month. This was, she added, “exactly what this Government are attempting to do”.

It is an appealing vision: a miraculous end to spiralling petrol prices, and no surge in energy bills when Ofgem’s price cap is reset in July.

But three weeks into the conflict, the war’s effect on the economy is deepening.

So far, the waiting and hoping has merely revealed the extent of the hammer blow facing the British economy. Inflation is rising, and at the worst possible moment for a Chancellor who had sought to use last year’s Budget to hold back the cost of living.

If livestreamed carnage from tankers and oil wells was not evidence enough, Andrew Bailey, the Governor of the Bank of England, set out the extent of the damage by abandoning plans for interest rate cuts and warning borrowing costs could have to rise instead.

This week, he dashed hopes that a longed-for de-escalation would bring full relief. “Energy supply would take time to recover even if the conflict abated,” read the somewhat understated minutes of this week’s meeting of the Monetary Policy Committee, chaired by Bailey.

Its assessment shows the pain has already begun and will only worsen over the year.

Drivers have been the first to feel the pinch. Petrol has climbed 10p per litre. Diesel is up twice as much.

This in turn spirals through the wider economy: businesses in every industry need energy, and the rising cost of transporting goods is among the more immediate effects.

Bailey pledged he would “stand ready to act as necessary” to keep a lid on inflation.

“A prolonged disruption to the supply of oil, natural gas and other commodities such as fertiliser and neon gas increases the upside risk to inflation,” he said.

Food prices will rise, fuelled by higher fertiliser costs as key ingredients come through the Middle East as well as the energy needed for everything from transport to baking bread for the shop shelves.

Analysts at Bank of America expect wheat and corn prices on international markets to rise by more than a third this year.

Meanwhile, household energy bills will fall next month with the lower price cap – set by the regulator before the war – then rise again in June.

Cornwall Insight predicts a 20pc increase in the summer to an average annual cost of £1,973.

On the current trajectory, the Bank is forecasting inflation to rise to 3.5pc in the third quarter of the year.

That will dash Reeves’s hopes of proving she has brought living costs under control. It will also bring multiple extra costs for the Chancellor, threatening to derail her autumn Budget too.

The public finances are always sensitive to inflation, and particularly so around September each year.

Price rises in that period are often used to set elements of government spending, such as the following year’s benefits upratings and the state pension.

At the time of the Spring Forecasts earlier this month, the Office for Budget Responsibility (OBR) predicted inflation would stand at 2.1pc in the third quarter of the year.

If the Bank of England is right, annual price rises will be up at 3.5pc. The Institute for Fiscal Studies calculates that means an additional £2.5bn will need to go towards working-age benefits alone.

The Bank, meanwhile, could be being optimistic. Analysts at Oxford Economics estimate inflation could top 4pc in the second half of the year.

Another direct cost from higher inflation is debt interest.

Around one quarter of the near-£3tn national debt is tied to prices, so higher inflation instantly translates into higher interest payments.

The OBR estimates that an extra percentage point on inflation in the coming financial year would cost Reeves £7.3bn.

Then comes the blow from higher interest rates.

Financial markets predict the Bank will raise the base rate from 3.75pc to 4.5pc over the next six months – a far cry from the two cuts anticipated just weeks ago.

An extra percentage point or so on short-term rates will cost the Chancellor around £8bn in the coming financial year alone.

Longer term debt also comes with higher rates. Yields on benchmark 10-year bonds hit 5pc, the highest level since 2008, with 20-year yields closing in on 5.5pc.

OBR estimates show each extra percentage point on gilts will cost the Government £1.2bn this year, but will grow over time to £10.4bn in 2030-2031.

The sustained nature of the inflation caused by the energy crisis will worsen the damage.

Britain already has the highest borrowing costs in the G7, as global investors charge these inflation-prone isles a higher rate of interest to compensate for risks including persistent price rises.

Agonising as these costs are, they are just the start of the Government’s woes.

Reeves’s plans to bring down borrowing over the coming years, despite ramping up spending on public services, revolve around giving only small further increases to departments in the final years of this Parliament.

That was already considered a difficult proposal, given the proximity to the next general election, even before the war.

Now government departments have to stretch those budgets to pay higher energy bills and other costs, so pressure will mount on the Chancellor to offer more cash.

Then there are Labour’s traditional backers: the unions.

Public sector workers revelled in significant pay rises almost the moment Labour came to power, but rapidly returned to the picket lines to demand yet more money.

The prospect of higher inflation gives them another reason to campaign for handouts.

An extra 1.5pc to compensate workers across the entire public sector for the unexpected rise in inflation this year would cost around £4.5bn annually, says Martin Beck, the chief economist at WPI Strategy. Patching up departmental budgets would cost in the region of another £10bn.

However, inflation should bring in more cash for the Government, too.

Higher prices mean higher VAT receipts – Beck puts the potential boost at £2.8bn.

The big bucks poured into the Treasury during the last cost of living crisis between 2022-2023 when workers secured pay rises to try to keep up with surging prices.

The spending power of those pay packets was still effectively frozen or even falling, but because the Conservatives had frozen income tax thresholds it resulted in a tax bonanza.

This time around, though, the jobs market is much looser: instead of jumping between employers to gain more cash, high unemployment means workers will count themselves lucky to have a job at all.

Fewer pay rises are in the offing as a result, limiting the extra tax haul.

On top of that, the Bank of England is keeping a close eye on pay rises, for fear that the energy shock will prompt a new wage-price spiral. Any increase in wages risks resulting in higher interest rates as officials seek to stamp out a self-reinforcing spiral of inflation, taking any additional tax receipts straight back out the door in higher borrowing costs.

All this is before Reeves has to decide whether she will subsidise bills or abandon her upcoming increase in fuel duty, each of which would cost billions of pounds.

Just three weeks ago, the Chancellor could proudly announce a rise in fiscal headroom as the OBR forecast she was on track to hit her borrowing targets with a margin of £23.6bn.

Now, forecasts for inflation, interest rates and the Government’s finances are increasingly tightly linked to the war in Iran, as is Reeves’s fate.

Waiting and hoping might have initially seemed a sound strategy. But, as the Chancellor watches bombs fall in the Middle East, her own plans are fast disintegrating.

For the UK economy, the pain is only just beginning – and no amount of wishful thinking will change that.

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