Iran War Has Only Small Effect On U.S. Economy So Far, Forecasters Say

The war against Iran will push up energy prices but seems likely to have only a modest effect on inflation and the U.S. economy, at least so far, several economists said Monday.

Energy prices rose Monday after the U.S. and Israel launched a bombing campaign against Iran, killing Supreme Leader Ayatollah Khomeini and provoking a wave of retaliatory drone and missile attacks against Israel, U.S. bases in the Middle East, and Gulf states. As of Monday afternoon, crude oil futures soared roughly 7%.

Fears rose that the war would disrupt sea traffic through the Strait of Hormuz, through which a quarter of the world’s seaborne oil passes. Natural gas futures were up 3.25%.

Economists said the conflict’s consequences on the U.S. economy could be minor if it ends soon.

“The military conflict with Iran is devastating for everyone involved, but the economic fallout has been limited, at least so far,” Mark Zandi, chief economist for Moody’s Analytics, wrote on social media Monday morning.

Whether the war causes a blip in the U.S. economy or sets off a crisis could depend on how long it lasts. As of Monday morning, the rise in oil prices was the 38th-highest spike in oil prices since 1990, smaller than the COVID-19 shock and the 2019 drone attack on Saudi oil facilities.

Gas prices are likely to rise 10 cents to 30 cents per gallon at the pump in the coming weeks, with diesel fuel rising by double that amount, Patrick DeHaan, head of petroleum analysis at GasBuddy, said in a commentary.

However, a prolonged conflict could push oil prices significantly higher, stoking inflation, undermining consumer confidence, and dragging on economic growth, economists said.

“From a market perspective, the energy market is the primary way through which this crisis is likely to impact global markets,” Kristian Ker, head of macro strategy for LPL Financial, wrote in a commentary. “Any sustained disruption to oil or natural gas flows, especially if both severe and long-lasting, has the potential to influence inflation expectations, weigh on business confidence, and elevate volatility across asset classes.”

It would take a much larger increase in the price of oil to severely hurt the U.S. economy, Tom Porcelli, chief economist at Wells Fargo Economics, wrote in a commentary.

“Our model simulations of 10% and 30% sustained increases in oil prices do not come close to generating a U.S. recession or markedly changing the trajectory for core inflation,” he wrote. “Absent a prolonged war and major long-term disruptions to key shipping routes in the Strait of Hormuz, the impact on U.S. economic growth, inflation and monetary policy should remain modest. Of course, the opposite also could be true.”

The outlook could easily change if the war drags on or spreads further.

“In isolation, the U.S.-Israeli attack on Iran doesn’t have a significant impact on the global economy,” Ryan Sweet, chief economist at Oxford Economics. “But there’s a growing risk that shocks begin to pile on top of one another, amplifying the hit. For instance, any disruption in the Strait of Hormuz could be magnified by renewed Houthi attacks in the Red Sea, or an underestimation of Iran’s ability to cause a sustained disruption in the Strait could intensify the effects. The duration of the conflict and the nature of any regime change remain impossible to pin down at this point but will have a crucial bearing on the future stability of the Middle East and the path for energy prices.”