Trump’s Iran War Adds Potential Shock for US Economy, Voters

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 US 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 US 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 US 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 US growth or inflation outlooks.”

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 US 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 US 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 US 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 US inflation expectations to be unanchored,” Bloomberg Economics’ Anna Wong and Tom Orlik wrote in a note Sunday. “Both are possible. Neither is guaranteed.”

—With assistance from Vince Golle and Malcolm Scott.

(Updates with Yellen comments in fourth paragraph.)

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