Israel’s attack on Iran Friday has catapulted their long-running conflict into what could become a wider, more dangerous regional war and potentially drive prices higher for both businesses and households. Oil and gold surged and the dollar rose as markets retreated, signalling a flight to investments perceived as more safe.
After years of sky-high inflation in the aftermath of the COVID-19 pandemic, Americans have become increasingly leery about the economy this year due to President Donald Trump's sweeping tariffs, though the impact so far has been muted. The latest escalation in the Middle East has the potential to cause widespread price increases that could set consumers back again.
Energy oil prices surged on Friday to their biggest gain since the onset of Russia’s war on Ukraine began more than three years ago. Iran is one of the world’s major producers of oil, though sanctions by Western countries have limited its sales.
If a wider war erupts, it could significantly slow or stop the flow of Iran’s oil. Energy prices have been held in check this year because production has remained relatively high and demand for it low. A widening conflict could tilt that balance. In the past, conflicts in the Middle East have sent energy prices soaring for extended periods, but in recent years, because of the huge supply of oil, those spikes have been more fleeting.
Government data this week revealed that Trump’s tariffs have yet to cause a broader rise in inflation. Still, many companies have announced price hikes due to the tariffs. Walmart has already raised prices on some goods and said it will do so again as the back-to-school shopping season begins. Combined with the higher shipping and production costs that could result from the escalated Middle East conflict, prices will almost certainly rise further, analysts say.
Perhaps contrary to conventional wisdom, one cascading effect of the heightened Middle East tension may be that the cost of travelling, even if fuel prices rise, will come down. Airlines have been downgrading their travel forecasts as businesses and families tighten their travel budgets in anticipation of tariff-related price hikes. Several major air disasters also have made some wary of getting on a plane.
Most major US airlines have said they plan to reduce their scheduled domestic flights this summer, citing an ebb in economy passengers booking leisure trips. Last month, Bank of America reported that its credit card customers were spending less on flights and lodging. And because of the Trump tariff wars, the dollar has fallen almost 10 per cent this year when measured against a basket of foreign currencies, making it more expensive for Americans to travel abroad due to unfavourable exchange rates.
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