WASHINGTON — President Donald Trump’s war against Iran risks delivering another shock to an economy that voters are already disenchanted with, just eight months out from midterm elections.
The biggest domestic effects for Americans would likely arrive via more expensive gasoline, with the U.S. and Israel launching attacks just a few days after Trump boasted about lowering pump prices in his State of the Union address. Economists are quick to caution that it’s too early to tell how the campaign for regime change in Iran will play out in energy markets. Crude was up by around 8% on Monday afternoon in New York.
Key to any impact on the U.S. economy, which has proved resilient in the face of Trump’s tariffs and immigration crackdown, is how long the war lasts. That will determine the disruptions to oil and natural gas shipments from Gulf producers — which in turn shape gas bills paid by Americans.
That’s another wrinkle for the Federal Reserve, which has stopped cutting interest rates and is on alert for rekindled inflation. Janet Yellen, the former Treasury secretary and Fed chair, said Monday it “puts the Fed even more on hold.”
There are broader risks too from a prolonged conflict that causes a new wave of supply chain problems.
All of this, together with the political price Trump’s Republicans could pay in November, hinges on the course of the war. The president, who’s pledged to avoid prolonged conflicts ever since he entered politics, said Monday that the U.S. projected a bombing campaign lasting four to five weeks, but is ready to extend that to “whatever it takes.” Defense Secretary Pete Hegseth dismissed the idea that could turn into the kind of forever war Trump opposed. “This is not Iraq, this is not endless,” he told reporters.
Recent polls show a majority of Americans already disapprove of Trump’s handling of the economy and signature policies like his tariffs, a sharp reversal from 2024 when he rode a wave of anger about inflation to victory.
Hormuz threat
Pump prices have traditionally played an outsize role in shaping how Americans feel about the economy. They can be heavily influenced by events in the Middle East because about one-fifth of the world’s seaborne oil and gas typically passes through the Strait of Hormuz, which Iran controls access to. Tanker traffic has slowed sharply since the conflict began on Saturday. If it doesn’t resume, crude would likely settle above $100 a barrel, according to energy consultancy Wood Mackenzie.
A rally to those levels would push nationwide gasoline prices up to around $4.50 a gallon, from $3 today, according to James Knightley, chief international economist at ING. That alone would add 1.5 percentage points to headline inflation, and there’d be knock-on impacts from things like air fares and distribution costs.
In a Sunday report, economists at investment bank Natixis posit one scenario where U.S. growth slows to between 0.5% and 1.5% this year, with inflation rising — and another where the economy contracts for at least a couple of quarters. The worse-case scenario is based on a broadening war that hits global shipping, squeezing corporate margins via “higher costs and logistical bottlenecks.”
To be sure, the U.S. is less vulnerable to oil shocks than it’s been in the past, because a massive increase in home-grown production has turned it into an energy exporter.
“There’s so much production of oil in the U.S. today, that non-dramatic changes in oil prices tend to have a relatively small impact on the economy as a whole, though there are clearly distributional effects,” said David Seif, chief economist for developed markets at Nomura.
Oil states like Texas would get a lift as prices rose. What’s more, with European natural gas prices soaring early Monday as Gulf supplies came under threat, there’s a potential upside for American sellers.
“The United States’ status as a net energy exporter may end up unexpectedly bolstering US GDP,” wrote Joseph Brusuelas, chief economist at RSM, who doesn’t see the initial market response as big enough to present “any material risk to U.S. growth or inflation outlooks.”
‘Bout of stagflation’
Analysts are trying to game out what happens if the conflict drags on or broadens and disruptions get worse — extending beyond energy. Some see signs of that already.
Former PIMCO boss Mohamed El-Erian points to spiking insurance premiums and cargo vessels that were turning back or rerouting, as well as air traffic disruptions. The cumulative effect is a “fresh potential bout of stagflation blowing through the global economy,” he wrote Sunday.
Other channels through which U.S. growth could take a blow include a war-induced downturn in stock markets — whose rapid gains have helped drive consumer spending — and fresh tensions in ties with China, which has friendly ties with Iran. Trump has been seeking to tamp down the trade war between the world’s two biggest economies, and he’s due to visit Beijing at the end of this month.
Cheaper gasoline has been a bright spot lately for U.S. consumers hit by waves of price hikes since the pandemic — one flagged by Trump in his set-piece speech to Congress last week, when he called pump prices under his predecessor “a disaster.”
Gauging the potential impact on monetary policy is harder. While higher energy prices are inflationary, the pressure they put on household finances could tend to slow growth.
“The U.S. may be energy independent, but rising prices still pinch consumption and the income that rotates to energy producers is not likely to be spent immediately,” Neil Dutta, head of economics at Renaissance Macro Research wrote in a note.
Even before the Mideast conflict broke out, there were enough signs in the recent price data to worry the Fed. Minutes of the central bank’s Jan. 27-28 policy meeting showed several officials suggesting that rate hikes may be needed if inflation remains stubbornly high.
“To get to a shift in Fed policy, we’d need to see the Iran war having a significant and sustained impact on oil prices, and for U.S. inflation expectations to be unanchored,” Bloomberg Economics’ Anna Wong and Tom Orlik wrote in a note Sunday. “Both are possible. Neither is guaranteed.”