Recent military strikes between Israel and Iran have dramatically escalated their long-simmering conflict, sending immediate jitters through global markets with oil and gold prices surging while the dollar rose. This intensification of tensions in the Middle East threatens to push costs higher not just for businesses, but directly into the wallets of everyday consumers already navigating a complex economic landscape.
For years, American households have wrestled with persistent inflation following the COVID-19 pandemic. More recently, President Donald Trump’s sweeping tariffs on imported goods have added another layer of uncertainty, leading many companies to announce price hikes even before the full impact was felt across the economy. Consumers are increasingly concerned about rising prices, making trade-offs, seeking deals, and delaying purchases, even as overall spending continues.
Now, the potential for a wider, more dangerous regional war in the Middle East presents new challenges, threatening to trigger widespread price increases on a variety of goods and services. Here’s a look at the key areas where consumers could feel the pinch.
Energy Prices Set to Rise
The most immediate and significant impact could be on energy costs. Following the recent strike, oil prices saw their largest single-day gain since the early days of Russia’s war on Ukraine over three years ago. Iran is a major global oil producer, and while Western sanctions currently limit its sales, a widening conflict could severely disrupt or halt its oil exports.
Energy prices had been relatively stable this year due to high production and low demand, contributing to declining gas prices over the past year (the average U.S. price for a gallon of gas was around $3.13 recently, down from over $3.40 a year prior). However, analysts warn that the potential loss of Iranian supply could eliminate the expected surplus in global supply later this year, tilting the delicate balance towards higher prices. While past Middle East conflicts have sometimes led to fleeting energy price spikes due to robust global supply, the current geopolitical climate suggests the impact could be more sustained if the conflict expands.
Soaring Shipping Costs Compound Issues
Global shipping costs were already on an upward trajectory due to multiple factors. Attacks on ships in the Red Sea by Iran-backed rebels have forced cargo ships to reroute, adding time and expense to voyages through a vital global trade artery. Simultaneously, companies rushed imports ahead of anticipated new tariffs, pushing demand and prices for shipping higher.
Indices tracking dry bulk shipping demand, like the Baltic Dry Index, have hit multi-month highs. A widening conflict in the Middle East would only exacerbate these pressures, further driving up shipping prices as companies compete to move goods from overseas amidst heightened regional tensions. Shares of ocean shipping companies have notably risen following the recent strike.
Higher Costs for Everyday Goods
The ripple effect of rising energy and shipping costs is significant. Because nearly everything we buy is manufactured and transported using oil or natural gas, higher costs for fuel and logistics inevitably translate into elevated prices for a wide range of consumer products.
This new pressure from the Middle East conflict comes on top of price increases already being implemented due to existing tariff policies. Many companies have announced price hikes specifically because of tariffs, including major retailers like Walmart and food producers like J.M. Smucker (which raised prices on items like coffee due to tariffs on imports from countries like Brazil and Vietnam).
Adding the impact of potentially higher energy and shipping costs to these pre-existing tariff-driven increases could push consumer goods prices significantly higher. Analysts predict “bigger spikes” in monthly inflation figures through the summer, noting reports of aggressive price hikes already planned by businesses, as highlighted in recent Federal Reserve reports. Items ranging from imported foods like seafood, coffee, certain fruits, cheeses, nuts, chocolate, and olive oil, to household staples and even durable goods like cars, shoes, and toys were already facing potential price increases due to tariffs alone. The conflict’s impact on energy and shipping will likely amplify these pressures.
Challenges for the Federal Reserve
The potential for rising prices poses a challenge for the U.S. Federal Reserve. Tasked with balancing support for the labor market with controlling inflation, the Fed was widely expected to hold its benchmark interest rate steady at its next meeting.
However, if the conflict leads to significant price increases for essential goods like gas and food, it could complicate this mission. Sustained price hikes could pressure Fed officials to consider raising interest rates, increasing borrowing costs for both businesses and consumers. This, in turn, could slow economic activity, potentially leading companies to cut jobs (particularly in growth sectors like technology) and forcing households to reduce spending, which drives the majority of the U.S. economy. Stock markets reacted negatively to the news, with shares of tech companies and retailers seeing declines.
A Paradoxical Outcome: Cheaper Travel?
In a potentially counterintuitive twist, the escalating Middle East tension might lead to lower travel costs, even if fuel prices increase.
Airlines have already begun lowering their travel forecasts as businesses and families tighten budgets, partly in anticipation of broader price increases from tariffs and economic uncertainty. Recent air travel incidents have also made some consumers wary. Major U.S. airlines plan to reduce domestic flight schedules this summer, citing a slowdown in leisure travel bookings. Data from major banks indicates consumers are spending less on flights and lodging.
Furthermore, the U.S. dollar has weakened against foreign currencies this year, making international travel more expensive for Americans due to unfavorable exchange rates. Combined with decreased demand driven by other economic pressures, this could lead airlines and hotels to lower prices to attract travelers, despite the potential for higher fuel costs. Shares of major U.S. airlines also retreated following the conflict’s escalation.
In summary, the escalation of the Israel-Iran conflict layers new potential price pressures on top of existing economic challenges like post-pandemic inflation and tariff impacts. Consumers could face higher costs for a wide array of goods and services as energy and shipping costs rise, complicating the economic outlook and potentially influencing everything from grocery bills and gas prices to borrowing costs, while paradoxically, travel costs might see a decrease.
