What War With Iran Means For Prices, Interest Rates, Supply Chains

Oil prices jumped and global stocks tumbled after US and Israeli retaliatory strikes by Iran and Tehran, but economists say the war is unlikely to have a major impact on the Federal Reserve’s next interest rate decision.

Meanwhile, the war that killed Iran’s supreme leader, Ayatollah Ali Khamenei, and led to traffic disruptions in the Strait of Hormuz is expected to mean higher fuel prices for American consumers and potentially stronger volatility in financial markets.

While analysts are looking for signs that higher energy costs could mean higher inflation, Wells Fargo economist Tom Porcelli said the war reflects an oil price shock, which is the kind of thing Federal Reserve officials intend to “look at all the time” when setting interest rates.

“…With no long-term war and major long-term disruptions in major shipping lanes in the Strait of Hormuz, the impact on US economic growth, inflation and monetary policy should remain modest,” Porcelli said in a special statement on March 2, adding that the situation has not changed. “Yes, the opposite can be true.”

What US consumers can expect

American consumers may have been hoping for cheaper gas given the recent activity in Venezuela, but now they are reaching the natural conclusion that prices may rise, according to Shikha Jain, partner and head of consumer affairs, North America at Simon-Kucher, a trade strategy consultancy.

Jain said it may be too early to know, but he doesn’t think there will be panic-buying of gas or groceries because of the war.

“You might start to see people trying to fill their car with as much gas as possible, but what else can you do besides that?” Jain said. “It’s not like you’re going to … suddenly keep tanks at home or barrels of electricity at home.”

Time will tell if gas stations see lines like they did during the COVID-19 crisis, he said. But the difference then was that people were preparing for the lockdown and many unknowns, he added.

President Donald Trump said he expected the campaign to last four to five weeks, but said the US military “has the capability to go much longer than that.”

Wayne Winegarden, chief economist at the Pacific Research Institute, said the timeline is critical. If the war is short, and the new Iranian leadership is able to strike a deal with the United States and Israel, Winegarden said American consumers could see higher prices at the gas pump for several weeks.

If the war drags on or escalates, he said, American consumers could see rising energy costs that could push the US economy further into recession.

“That’s what scares me the most,” Winegarden said. “Both are possible.”

What does war with Iran mean for the government reserve?

The next meeting of the Federal Open Market Committee is scheduled for March 17 to March 18, giving officials a few weeks to judge whether the war on Iran actually represents a temporary oil shock, or a new factor that will contribute to a further decline in prices.

An internal Fed paper, published last year as part of the central bank’s Finance and Economics Discussion Series, found that Russia’s invasion of Ukraine, which disrupted oil markets, and the COVID-19 pandemic, were the biggest drivers of inflation in the United States from 2020 to 2023.

So far, Porcelli said the Iran war is unlikely to have a major impact on the Fed’s future interest rate decision.

“A rise in oil prices could lead to higher inflation, but this would be driven by supply shocks rather than excess demand,” Porcelli said in the document. “Therefore, the tightening of monetary policy will do nothing to reduce the raging inflation and will instead increase the momentum in economic growth.”

Porcelli added, however, that Fed officials will likely be sensitive to any deviation from inflation expectations as the battle continues. “But again, any instability here will come from protracted wars and continued energy prices,” he said.

For now, Fed officials are likely to take a wait-and-see approach, depending on the data, according to Oxford Economics’ Chief Global Economist Ryan Sweet and Director of Global Macro Research Ben May.

Winegarden told USA TODAY that the war reinforces hope that the Fed will keep rates tight “because of all the uncertainty.” As of March 2, forecasters are predicting that the FOMC will hold its benchmark interest rate steady at 3.5% to 3.75% at its next meeting.

How does the war with Iran affect supply chains?

Markets watched the war continue over the weekend as Iran supplies nearly 4% of the world’s crude oil and controls the Strait of Hormuz.

Oil supply disruptions could push prices higher, although several political shocks have historically led to short-term increases with limited market impact, according to Angelo Kourkafas, global strategist at Edward Jones.

“Oil prices tend to rise ahead of these events. Markets may have already priced in a major risk, and prices may decline from here,” Kourkafas told USA TODAY, adding that the global oil market is oversupplied. “Structural changes, such as the U.S. becoming a net petroleum exporter and declining energy levels in the economy, also provide resilience.”

Jain said higher fuel prices could increase the cost of construction materials — costs that businesses would need to keep up with and which would likely be passed on to consumers.

Gasoline prices may be at their peak right now for consumers, Jain said, “but as this goes up, we may see different patterns.”

Air freight networks are also experiencing problems, with FedEx suspending flights to and from Bahrain, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia and the United Arab Emirates due to security concerns.

Those planes, along with trains, cars, and construction materials, all depend on oil and gas to run.

“Anything from point A to point B to the end of the supply chain is affected by this,” said Amanda Oren, vice president of grocery sector strategy at RELEX.

This article first appeared in USA TODAY: What war with Iran means for prices, interest rates, supply chains

Reporting by Rachel Barber and Betty Lin-Fisher, USA TODAY / USA TODAY

USA TODAY Network via Reuters Connect