Inflation risks rise again before the US midterm elections; industry insiders: Iran conflict may erode Republican support rate

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Media analysis suggests that the latest Middle East conflict may deliver another blow to the already unpopular U.S. economy, with only eight months left until the U.S. midterm elections.

For the American public, the most direct impact is likely to be seen in higher gasoline prices. On Monday afternoon, crude oil prices in the New York market rose about 8%. Just days before the U.S. and Israel launched attacks, Trump was still boasting in his State of the Union address that he had lowered oil prices. For American consumers, who have suffered multiple rounds of price increases since the pandemic, falling oil prices had once been a highlight. In his speech in Congress last week, Trump referred to oil prices during his predecessor’s term as “a disaster.”

Gasoline prices have always played a significant role in shaping Americans' perceptions of the economy. Since roughly one-fifth of the world’s seaborne oil and natural gas typically move through the Strait of Hormuz, which is controlled by Iran, Middle East tensions are especially impactful on oil prices. Since the conflict erupted on Saturday, tanker shipments have dropped sharply.

Industry insiders predict that if shipping cannot resume, crude oil prices may stabilize at over $100 a barrel. If oil prices reach this level, the U.S. national average gasoline price may rise from the current $3 per gallon to about $4.50. This alone could raise the overall inflation rate by 1.5 percentage points, and will have cascading effects on airfare and transportation costs.

Currently, thanks to a sharp rise in U.S. domestic crude production, the country has become an energy exporter, making it less vulnerable to oil price shocks than in the past. Non-dramatic oil price fluctuations have limited impact on the overall economy, but distribution effects remain evident.

Some analysts point out that while the U.S. may have achieved energy independence, price increases will still squeeze consumption, and the income that flows to energy producers will not immediately translate into spending. Other analysts believe the U.S.’s status as a net energy exporter could unexpectedly boost GDP, and the initial market reaction is not sufficient to pose “substantive risks to U.S. growth or inflation outlook.”

The U.S. economy previously showed resilience against Trump’s tariff policies and immigration crackdowns. The key to this war’s economic impact depends on how long the conflict lasts. On Monday, Trump said the U.S. expects bombing to continue for four to five weeks but is also prepared to extend “for any necessary time.” U.S. Defense Secretary Hegseth denied this would turn into the “endless war” Trump opposes, stating “This is not Iraq, this will not be a never-ending war.”

The duration of the conflict will determine the degree to which oil and gas shipments from Gulf producing countries are disrupted, and thus affect the gasoline bills paid by Americans. If the conflict drags on, broader risks may emerge, including a new round of supply chain issues.

Economists warn that it is still too early to judge how this campaign for regime change in Iran will affect energy markets.

Recent polls show most Americans no longer approve of Trump’s handling of the economy and his signature policies, such as tariffs. This stands in sharp contrast to 2024, when he won victory thanks to voters’ dissatisfaction with inflation.

Analysts are assessing what may happen if the conflict drags on or expands, causing greater disruptions:

Economists at the French investment bank Natixis envisioned a scenario in their Sunday report where U.S. economic growth slows to 0.5% to 1.5% this year, while inflation rises; another scenario features at least two consecutive quarters of economic contraction. The worst case scenario is based on the war expanding and impacting global shipping, thereby squeezing corporate profit margins through higher costs and logistics bottlenecks.

Former PIMCO chief El-Erian noted that soaring insurance costs, ships turning back or rerouting, and interruptions in air transport may cumulatively become “a new wave of stagflation shock sweeping through the global economy.”

In addition, the war has caused the U.S. stock market to fall, and previous stock market gains had supported consumer spending, potentially hitting U.S. economic growth.

Assessing the impact on monetary policy is even more complex. Although rising energy prices may push up inflation, the squeeze on household finances could also suppress growth.

The Middle East conflict has also presented new challenges for the Federal Reserve. The Fed has paused interest rate cuts and is wary of a resurgence in inflation. Former U.S. Treasury Secretary and former Fed Chair Yellen said Monday that this makes the Fed more likely to remain on hold and less willing to cut rates.

In fact, even before the outbreak of the Middle East conflict, recent price data was already concerning the Fed. Minutes from the Fed’s January policy meeting show that if inflation remains stubbornly high, some officials even believe rate hikes may be necessary. Media analysis notes that for the Fed’s policy to pivot, we need to see the Iran war cause a significant and sustained impact on oil prices, leading to unanchored U.S. inflation expectations. Both scenarios are possible, but neither is guaranteed.”

Analysis suggests that all of this, and the potential political price the Republican Party led by Trump might pay in November, depend on the outcome of the war.

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