Inflation concerns intensify as U.S. and Israeli actions against Iran escalate tensions
WASHINGTON (AP) — Oil prices climbed for the second consecutive day, and gasoline costs followed suit in the United States, spotlighting the inflation risks tied to the ongoing Iran conflict.
After nearly five years of persistently higher costs, even a modest price uptick could dampen Americans’ enthusiasm about the economy and amplify the affordability pressures that have dominated political discourse.
On Tuesday, U.S. crude surged more than 5%, trading around $75.22 per barrel in afternoon sessions. Average nationwide gasoline prices rose by 11 cents, reaching about $3.11 per gallon, according to AAA.
Economists emphasize that the duration of the conflict and the status of key shipping routes like the Strait of Hormuz—the gateway for roughly a fifth of global oil and natural gas shipments—will largely determine the inflationary impact. A brief disruption might have only a short-lived effect on prices and the economy. However, a conflict lasting several months could push inflation higher, potentially surpassing 3% for the first time since early 2024.
Ways the war could weigh on the economy
Inflation has remained sticky in some areas even as gasoline prices eased
Although some inflation measures have cooled recently, the Federal Reserve’s preferred gauge has hovered around 3% for about a year. That level remains above the Fed’s 2% goal, even as gasoline prices declined through much of 2025.
If gas prices jump again, airlines could face higher fuel costs, potentially lifting airfares. Transportation and shipping costs would rise, risking higher grocery prices. Oil feeds into chemicals, plastics, and various industrial processes, so elevated oil prices could have broad ripple effects.
Natural gas prices have also surged, partly due to the shutdown of a liquefied natural gas plant in Qatar, which could lift electricity costs in the U.S. Additionally, natural gas has climbed roughly 10% over the past year, partly driven by intensifying energy use at data centers powering AI.
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But many economists note the economy is less oil-intensive than in the past, with a larger share of jobs in services rather than manufacturing.
Other factors could help contain oil-price pressures. Rory Johnston of Commodity Context points out that inventories were relatively high before the current conflict, a contrast to the winter of 2022 when pandemic-related supply chain issues already pushed oil costs higher ahead of Russia’s invasion of Ukraine.
Trump weighs in on price trajectory
President Donald Trump acknowledged that oil and gas prices have risen amid U.S. involvement in the Middle East conflict, but he predicts prices will fall once the fighting ends, potentially dropping below pre-crisis levels.
“Prices will rise a bit while the conflict lasts, but once this ends, I believe they’ll retreat, perhaps even lower than before,” Trump told reporters in the Oval Office.
Industry dynamics and price sensitivity
For every $10 uptick in a barrel of oil, economists estimate U.S. gasoline could rise by about 25 cents. If prices sustained above $100 per barrel, gasoline might approach $3.50 per gallon or higher.
Uncertainty could temper business sentiment
Should the Iran conflict drag on for months, business confidence could weaken, leading companies to scale back investments and hiring, according to Nationwide Financial chief economist Kathy Bostjancic.
“New uncertainty tends to dampen confidence,” she noted.
The ripple effects could resemble those seen with tariffs, which, while not always triggering sharp price spikes, can weigh on job gains. Hiring in 2025 was among the weakest outside of a recession since 2002.
Public sentiment on the economy could further erode
Even without a sharp inflation spike, a prolonged Iran conflict that drives up gas prices could worsen public perceptions of economic leadership. Surveys show Americans already hopeful for relief clouds of price spikes from the past five years, and Trump’s framing of the economy as a “golden age” has done little to shift those views.
Alex Jacquez of the Groundwork Collaborative, an economic adviser to the Biden administration, says a protracted conflict that raises fuel costs would likely dampen public optimism about economic leadership and focus on everyday concerns like groceries.
Interest-rate expectations may shift upward
If inflation moves higher, the Federal Reserve could resist further cuts in rates. The Fed has trimmed its key rate three times last year but held rates steady in January amid ongoing tensions. Rate reductions tend to lower borrowing costs for mortgages and auto loans over time.
Before the Iran developments, Minneapolis Fed President Neel Kashkari signaled openness to at least one rate cut that year as inflation cooled. With new geopolitical risks, he tempered that stance, saying more data were needed.
Futures markets reflect a cautious stance
Financial markets price in roughly two rate cuts for the year, but the likelihood of those cuts has diminished since the Iran conflict began, and lawmakers across the board have debated the timing and scale of policy relief.
Bottom line
The Iran conflict introduces new inflationary and growth uncertainties that could influence energy prices, consumer costs, and the trajectory of economic policy. As the situation evolves, investors, businesses, and households will be watching fuel costs, transport prices, and central-bank actions closely to gauge how resilient the economy may remain in the face of higher energy prices and geopolitical risk.
Would you agree that a short, contained conflict is less likely to meaningfully derail inflation, or do you think any sustained tension could set off more lasting price pressures? Share your thoughts in the comments.
