A widening conflict involving Iran has delivered a sharp new shock to the US economic outlook. Oil prices have surged to their highest in a year, and stock futures are tumbling as worries build over a spreading conflict in the Middle East.
Economists caution that the broader economic impact hinges on the duration and intensity of the conflict. A brief flare-up would likely have a limited, temporary mark, but a prolonged confrontation could prove more damaging. The primary concern centers on the flow of crude oil and liquefied natural gas (LNG) shipments from the Gulf. While current global oil supplies are sufficient for the short term, sustained disruption, particularly affecting the Strait of Hormuz, could drive crude prices above $100 a barrel. This would likely push US petrol prices towards $3.50 a gallon, feeding directly into inflation and weighing on consumer spending and economic growth.
Inflation, though cooled from its post-pandemic peak, remains elevated. A renewed rise in fuel costs would have ripple effects, potentially increasing airfares and shipping costs, thus impacting food prices. Natural gas prices have also climbed due to supply disruption concerns. Despite these pressures, the US economy is less oil-intensive than in previous decades, with services accounting for a larger share of output and employment, reducing its vulnerability to oil shocks. Global oil inventories are also relatively high, providing a buffer.
However, a protracted conflict could torpedo business confidence, leading companies to reduce investment and hiring. For President Donald Trump, the political risks are significant, as a sustained rise in petrol prices could deepen public pessimism about the economy and the cost of living. Ultimately, much depends on whether the conflict remains contained. If it does, the economic shock may be fleeting. If not, the US economy faces another test at a delicate moment.