Iran attacks threaten US economy with more uncertainty around inflation, growth

Oil prices surged for the second consecutive day on Tuesday, with U.S. gas prices also climbing, highlighting the inflation risks posed by the escalating conflict with Iran. U.S. oil prices rose more than 5% to $75.22 per barrel in afternoon trading, while the national average for gasoline jumped 11 cents to $3.11 per gallon, according to AAA.

Economists warn that the duration of the conflict will be a critical factor in determining its economic impact. Of particular concern is the potential disruption to the Strait of Hormuz, a vital shipping channel through which approximately one-fifth of the world’s oil and natural gas passes. A brief conflict might have limited economic consequences, but a prolonged engagement lasting several months could push inflation above 3% for the first time since early 2024.

The timing is particularly concerning as inflation has remained stubborn even during periods of declining gas prices. The Federal Reserve’s preferred inflation measure has hovered around 3% for roughly a year, exceeding the central bank’s 2% target despite falling fuel costs throughout 2025.

Higher oil prices could have wide-ranging effects beyond the gas pump. Airlines may raise ticket prices to offset increased fuel costs, while shipping expenses could climb, potentially driving up grocery prices. The impact could extend further as oil is a key component in chemicals, plastics, and various industrial processes.

Natural gas prices have also increased sharply following the closure of a liquid natural gas plant in Qatar. This development could lead to higher electricity costs for American consumers, compounding the 10% increase in natural gas prices already experienced over the past year—partly due to surging energy consumption by AI data centers.

Industry experts note some mitigating factors that could limit price increases. Rory Johnston, founder of oil analytics firm Commodity Context, pointed out that pre-conflict oil inventories were relatively high, which has helped moderate price increases. This stands in stark contrast to early 2022, when supply chain disruptions had already driven up oil prices before Russia’s invasion of Ukraine caused a more dramatic spike.

President Donald Trump acknowledged the rising energy prices but expressed optimism about the future. “We have a little high oil prices for a little while, but as soon as this ends, those prices are going to drop, I believe, lower than even before,” he told reporters in the Oval Office.

Economists estimate that for every $10 increase in the price of a barrel of oil, U.S. gas prices rise approximately 25 cents. If oil prices exceed $100 per barrel, gasoline could approach or surpass $3.50 per gallon.

Beyond immediate price concerns, a protracted conflict could undermine business confidence. Kathy Bostjancic, chief economist at Nationwide Financial, warned that heightened uncertainty could lead companies to reduce investment and hiring. “When there is an injection of new uncertainty into the business environment… that’s a hit to confidence,” she explained. The effect could mirror the impact of Trump’s tariffs, which, while not dramatically increasing prices, appeared to dampen job growth. Hiring in 2025 was the weakest outside of a recession since 2002.

The Iran conflict presents a significant political risk for President Trump, potentially reinforcing Americans’ already pessimistic economic outlook. Despite Trump’s efforts to portray the U.S. as experiencing a “golden age,” public sentiment remains largely negative, primarily due to the lingering effects of price increases over the past five years.

Alex Jacquez, chief of policy and advocacy at the Groundwork Collaborative and former economic adviser to the Biden White House, noted, “People generally don’t think that President Trump is focused on the things that they are focused on, and what they want him to be focused on is the price of groceries. What they think he’s focused on are things like tariffs and foreign policy.”

The conflict could also influence the Federal Reserve’s interest rate decisions. With inflation potentially trending upward, the Fed might further delay additional rate cuts. Neel Kashkari, president of the Federal Reserve Bank of Minneapolis and one of 12 voting members of the Fed’s rate-setting committee, indicated that while he had previously supported at least one rate cut this year as inflation gradually cooled, the geopolitical situation has introduced uncertainty.

Financial markets have been anticipating two rate cuts in 2024, but the probability of these reductions has diminished since the outbreak of hostilities with Iran. This comes despite Trump’s vocal demands for more aggressive rate cuts to stimulate the economy.