The United States and Iran are engaged in intensive hostilities as President Donald Trump asserts the Islamic Republic must “pay the price” for lengthy negotiations. While this conflict and a U.S. naval blockade heavily strain Iran’s economy, it also burdens global consumers, including those in the United States.
Rising Inflation
The Consumer Price Index revealed a 4.2% inflation increase in May compared to the previous year, marking a three-year high. Energy prices rose 20.3%, with gasoline prices up by 40.5%. This surge fuels concerns of prolonged conflict causing further inflation and economic slowdown, affecting already strained U.S. consumers.
“The economic fallout of the Iran war is weighing increasingly heavily on U.S. consumers,” said Mark Zandi, chief economist at Moody’s Analytics.
The average American household has incurred an additional $510 in costs due to rising fuel prices.
An Unequal Burden
The Trump’s administration’s tax reforms intended to relieve U.S. taxpayers now face setbacks due to Middle East tensions. The conflict undermines progress, with low and middle-income households experiencing significant pressure from rising energy expenses.
According to Zandi, “the personal tax cuts increased the typical refund check by less than $350,” which is overshadowed by the $510 increase in household expenses.
Diane Swonk, chief economist at KPMG U.S., highlights that inflation disproportionately impacts lower-income Americans, widening economic inequality. While higher-income earners continue spending, others struggle with rising costs.
Economic Resilience Tested
The crisis follows previous economic shocks like the COVID-19 pandemic and Russia’s 2022 Ukraine invasion. The U.S. alliance with Israel against Iran further disrupts global oil and gas markets, affecting various economic sectors such as AI and agriculture.
Swonk warns that assuming these disruptions will resolve independently ignores recent history. Inflation now seems normalized, posing a continuous threat.
Behind the Numbers
Trump appears undeterred by economic data, suggesting post-war inflation will decline. Betsey Stevenson, economics professor at the University of Michigan, notes gasoline prices rose by 21% and energy by 11% at the war’s onset. Although inflation remains high, the monthly rate is not steadily increasing.
“When we strip out food and energy and focus on core inflation, the rate in May was below that in April,” Stevenson explained.
The 1970s oil shocks provide historical context, emphasizing changes since then in U.S. oil dependency and production capacities. Ryan Nunn, director of research at Yale University, points out reduced oil use per economic output and increased domestic oil production, mitigating historical levels of economic impact.
The Longer, the Worse
Nunn cautions extended conflict will worsen economic shocks. The Federal Reserve’s response in managing prices could influence inflation and economic activity. Michael Pearce of Yale University’s Budget Lab notes GDP growth projections have lowered from 2.8% to 2.1%, assuming a near-term resolution.
If the conflict persists, oil prices may reach $150, straining consumers and supply chains, and potentially slowing economic growth further. Pearce, however, believes a recession risk is still distant, forecasting sluggish growth in such an environment.