Fuel prices may rise and remain high for months. This can make groceries and other shipped goods more expensive. And consumers and businesses, plagued by rising costs, could choose to spend less, limiting economic growth.
In the eyes of economists, it is the increasingly real and dire picture of the US-led war with Iran, now in its second week. It may be a conflict President Trump created, but it is becoming the world’s latest economic headache, one that has sent foreign leaders scrambling for ways to limit the potential fallout.
At the heart of the panic is an increase in the price of oil, which at one point rose above 100 dollars per barrel on Monday. Because energy is central to the functioning of the global economy, the turbulence has raised fears of a protracted conflict that could take a deep economic toll around the world, including on Americans.
In response, world leaders called an emergency meeting of the Group of 7 countries on Monday, where finance ministers considered but decided against tapping their national oil reserves to increase available supply. The meeting came when Mr. Trump continued to argue that the war he started with Iran would be short, making it unnecessary for the US government to launch a major economic response. The president is due to appear at a press conference later Monday.
For days, Mr Trump has denied or downplayed the risks posed by his attack on Iran. He has even described the increase in gasoline prices as a “very small price to pay” for national security. The comments have offered a stark contrast to the president’s earlier boasts about falling gas prices earlier in his second term, a development he often portrayed as a strong gauge of the nation’s trajectory.
The effect seemed anything but small to the Americans. The average price of a gallon of gasoline reached nearly $3.48 nationally on Monday, according to AAA, up 16 percent from a week earlier. The rise in energy costs spooked financial markets, sending the S&P 500 and other major stock indexes down.
In many ways, the fallout has resembled the global panic that greeted the start of Mr. Trump’s trade war almost a year ago. Then economists also warned of looming upheavals, while world leaders panicked about the consequences for their economies. Some of the dire predictions came true, and consumers and businesses were shaken in a way that is still felt today.
Still, Mr. Trump remained undeterred. With Iran, Mr Trump has once again moved ahead despite warnings that a long military engagement could inflict lasting damage, perhaps even touching off a global recession.
“This is a very worrying shock to consumers, who have been a driver of the economy,” said Tim Mahedy, chief economist at Access/Macro, a research firm who previously worked at the Federal Reserve Bank of San Francisco.
He noted that consumer spending, which drives about 70 percent of U.S. economic growth, was the only sector that grew through most of last year. Now that Americans have gone through their savings, Mr. Mahedy that the energy shock “really hits at a bad time.”
“I am very concerned that this could lead us into a recession if it continues,” he said.
Exactly how the war will ripple across the global economy may depend mostly on one factor – its duration. This is because the conflict has hindered shipping in the Persian Gulf, which has snared most of the world’s oil and gas. The longer the slowdown, the worse the toll will be, although the administration has signaled it believes shipments could soon start again.
“We’re not too long, I think, before you’re going to see more regular resumption of shipping through the Strait of Hormuz,” Chris Wright, the energy secretary, said in an interview Sunday on CNN’s “State of the Union.”
If the US strike on Iran ends in a few weeks, most economists believe the spike in gas prices and other disruptions could prove short-lived. But that doesn’t mean the war will be painless, especially for Americans who are already suffering a real squeeze at the pump.
“If $100-per-barrel oil is sustained, you will see the impact most directly in less consumer spending,” said Bernard Yaros, the lead U.S. economist at Oxford Economics. He added that low-income consumers would bear the brunt because energy accounts for so much of their monthly spending.
However, if hostilities continue for many months, the damage to the global economy could be more pronounced. Oil could remain above $100 a barrel. gallon in a worst-case scenario, with dire consequences that would make goods more expensive and slow global growth, said Gregory Daco, chief economist at EY-Parthenon.
A prolonged conflict could cause inflation globally to rise about two percentage points faster than it would otherwise have done, he estimated. In the US, this means that inflation could top 4 percent this year. The price increase would coincide with a slowdown that could tip a recession and lower overall US output. The nation’s gross domestic product, a measure of that output, would grow by just 1.6 percent in 2026, compared with the 2.4 percent originally projected, Mr. Daco.
These new risks have emerged at a vexing time for the U.S. economy, which is still growing at a time when prices are high and the labor market is showing new signs of weakness. The competing forces are the result of factors including the meteoric rise of artificial intelligence and Mr. Trump’s policies, including his high tariffs and mass deportations.
“This administration is a sequence of supply shocks,” Mr. Mahedy. “This comes on top of two other very significant supply shocks, tariffs and immigration policy.”
Despite these warnings, the Trump administration has been optimistic about the pace of the war with Iran. Asked over the weekend if he was concerned about the rise in gas prices, Mr. Trump to reporters: “No. This is a short excursion into something that should have been done for 47 years. No president had the guts to do it.”
But Mr Trump has also not ruled out sending troops into the country, which would mark a dramatic escalation of the fighting. With an ever-changing definition of what makes the operation a success, the president has taken some steps to insulate Americans from economic fallout.
Last week, the US government said it would offer limited protection and insurance for tankers crossing the Persian Gulf. The Treasury Department began taking steps that could allow sanctioned Russian oil to be sold to other countries, including India.
The lifting of those sanctions, which were recently strengthened in response to Russia’s invasion of Ukraine, marked a dramatic turnaround for Mr. Trump, who had previously threatened to wither tariffs on countries that bought Russian energy. It was also an attempt to shore up oil supplies, although the president’s top aides insisted they would not tap US reserves to ease the pressure on the market.
“From my early briefings on what was going to happen and how it would affect the economy, it’s moving much faster, it’s been far more successful than I expected, just by listening to the briefings,” Kevin Hassett, the director of the White House National Economic Council, said during an appearance on CNBC last week.
“I think the bottom line is there is some disruption right now,” he said, “but in the White House we have our eyes on the horizon.”
