Labour should cut fuel duty by 10p and reduce motorway speed limits to 60mph to prevent damage to the economy from the Iran war, according to an influential Left-wing think-tank.

The Institute for Public Policy Research (IPPR) also argued that typical energy bills should be capped at £2,000, with tax raids on energy firms, banks and private air travel to help pay for the measure.

Its intervention on fuel duty is likely to be seen as particularly significant because the Chancellor is currently planning to hike the tax by 5p-a-litre later this year.

Rachel Reeves has so far resisted calls from opposition parties and industry to scrap the hike at a time when soaring oil prices are already sending prices at the forecourt soaring. The IPPR report means she is also now facing pressure from the Left to ease the fuel duty burden.

The think-tank found that without such interventions, a prolonged stalemate in the Middle East could see inflation hit nearly 6 per cent and growth slow to 0.3 per cent.

That would result in higher borrowing costs and lower tax revenues ultimately costing the Treasury £8billion a year, the IPPR found. It said its proposed measures, costing up to £5billion a year, would effectively pay for themselves by preventing these.

William Ellis, senior economist at the IPPR, said: 'The UK cannot afford to sit back and let another energy shock drive up inflation and damage the economy.'

The think-tank argued that the fuel duty cut and energy price cap should be put in place from the start of July to the first quarter of next year and could mean inflation is two percentage points lower than it otherwise would be. 

That would remove pressure on the Bank of England to tackle high inflation through damaging interest rate hikes, the report said.

It comes after the Bank of England warned last week that interest rates may have to be raised up to six times to 5.25 per cent in the event of a crisis in the Middle East that sees oil prices above $120 for a prolonged period.