Here's what the Israel-Iran conflict could mean for the economy
(NewsNation) — Uncertainty has been the economic theme of the year, and escalating conflicts in the Middle East threaten to drive up energy prices and could squeeze household budgets even further.
Oil prices surged and stocks fell after Israel attacked Iranian nuclear and military targets Friday morning. Meanwhile, gold prices soared as investors flocked to safe-haven assets.
Geopolitical shocks are often short-lived in financial markets, so this probably isn't the time to cash out your 401(k). But don't be surprised if your wallet feels the impact elsewhere.
How close is Iran to having nuclear weapons?
Trade routes in the region are a key concern, particularly the Strait of Hormuz. The narrow waterway connects oil and gas producers around the Persian Gulf to global export markets and handles nearly 30% of the world's oil trade, according to the International Energy Agency.
Israel's attack also raises the odds the Federal Reserve will hold interest rates steady next week, a decision that will keep borrowing costs elevated for American consumers as the central bank continues to battle inflation.
Economists largely expected the Fed to leave rates alone at June's meeting before the conflict escalated in the Middle East, and the latest attack is unlikely to push policymakers out of their 'wait-and-see' stance.
Iran is among the world's largest producers of oil and has managed to maintain a booming global trade despite Western sanctions. Nearly all of its oil is being shipped to China, per the International Energy Agency.
A major disruption to Iran's oil exports could prompt China to purchase more oil elsewhere, potentially affecting global markets.
Lower gas prices have been one of the few bright spots for U.S. consumers recently, but they could soon tick up, though likely nowhere near the record highs of June 2022.
Oil prices surge after Israel attacks Iran
'I still expect gas prices to remain below last summer's levels, but the national average will likely climb 5-15c/gal over the next week or two,' Patrick De Haan, GasBuddy's head of petroleum analysis, wrote on X Friday afternoon.
De Haan said diesel prices will likely see even larger increases, potentially 10 to 30 cents per gallon, over the next two weeks.
More expensive energy tends to drive up costs on just about everything from groceries to shipping, but that doesn't mean we'll see the type of shock that followed Russia's invasion of Ukraine.
Earlier this month, the countries in the OPEC+ alliance decided to ratchet up oil production again, which can push crude prices down.
The average price for a gallon of gas in the U.S. on Friday was $3.13 per gallon, down from $3.46 a year ago, according to AAA. That's also well below the all-time high of $5.02 per gallon in June 2022.
Economists have warned that President Trump's trade war could lead to higher prices for consumers down the line, but the latest inflation data suggests that hasn't happened in a major way yet.
But a prolonged and intensifying conflict in the Middle East would place further pressure on an already fragile global economy.
Walmart has already started raising prices on some goods due to costs from tariffs, and higher energy prices could further worsen the situation.
Still, the real inflationary impact of the president's on-again, off-again trade war may not show up for several months.
'Inflation is very likely going to increase,' Marc Giannoni, chief U.S. economist at Barclays, told The New York Times. 'It is a question of time, not so much of if.'
Back in December, EY-Parthenon chief economist Gregory Daco outlined the potential economic impacts of three different Middle East scenarios. A direct engagement between Israel and Iran was considered one of the most severe, classified as a 'significant escalation scenario.'
'This scenario could lead to a sharp increase in oil prices and potentially trigger significant inflationary pressures and global supply chain issues,' Daco noted, adding that a global recession would 'likely ensue.'
Copyright 2025 Nexstar Media, Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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