A widening conflict involving Iran has delivered a sharp new shock to the outlook of the "greatest economy ever", as US president Turmp put it just a week ago.
Oil has shot to its highest in a year and stock futures are tumbling on Tuesday as worries build over a spreading conflict in the Middle East.
Economists caution, however, that the broader economic impact will hinge on the duration and intensity of the conflict.
A brief flare-up, they suggest, would leave only a limited and temporary mark. A prolonged confrontation could prove more damaging.
At the centre of the concerns are the 14 to 15 million barrels of crude oil and one-fifth of the global LNG shipments that come from the Gulf.
According to experts, the world has enough oil for the short run because Iran, Saudi Arabia, the United Arab Emirates and Iraq moved large quantities out of the Gulf ahead of US and Israeli attacks.
On Tuesday, benchmark US crude traded up by more than 6.7% at $76 a barrel.
Brent crude, the international standard, rose by more than 7.2% to above $83 at the time of writing.
At these levels, the effect on overall inflation would be modest compared to the sharp energy spikes that followed Russia’s invasion of Ukraine in 2022.
“While cost-conscious Americans will not take this increase lightly, such a move would not materially affect economic growth,” Joe Brusuelas, chief economist at RSM, told AP.
A sustained disruption — especially one affecting the Strait of Hormuz, through which roughly a quarter of the world’s oil supply passes — could drive crude prices above $100 a barrel. US petrol prices, currently just under $3 a gallon on average, could climb towards $3.50, economists estimate.
That would feed directly into inflation while weighing on consumer spending and economic growth.
Alex Jacquez, chief of policy and advocacy at the Groundwork Collaborative, said markets may be underestimating the possibility of a drawn-out engagement. “There is a tail risk here of a sustained operation that does not wrap up quickly and restore normal flows through the Strait of Hormuz,” he said.
Inflation pressures linger
Inflation has cooled from its post-pandemic peak but remains elevated. The Federal Reserve’s preferred measure has hovered at about 3% for much of the past year — above the central bank’s 2% target — even as petrol prices eased through much of 2025.
A renewed rise in fuel costs would have knock-on effects. Airlines facing higher jet fuel prices could lift fares. Shipping costs may increase, adding pressure to food prices.
Natural gas prices also rose on Monday amid concerns over supply disruptions in the Gulf, with around a fifth of global liquefied natural gas shipments passing through the Strait of Hormuz.
Natural gas prices were already up roughly 10% over the past year, partly reflecting higher demand from data centres powering artificial intelligence systems.
That said, the US economy is less oil-intensive than in previous decades. Services account for a far larger share of output and employment than manufacturing, reducing its vulnerability to oil shocks.
Inventories may also cushion the blow.
Rory Johnston, founder of Commodity Context, noted that global oil stockpiles were relatively high before the conflict — in contrast to early 2022, when supply chains were already strained before Russia’s invasion of Ukraine sent prices surging.
Monday’s rise, he said, was “minor” compared with that earlier spike.
Confidence at risk
If the Iran war drags on for months, it could also torpedo business confidence, which could lead companies to invest and hire less, said Kathy Bostjancic, chief economist at Nationwide Financial.
“When there is an injection of new uncertainty into the business environment ... that's a hit to confidence," she said.
The result could be similar to the impact of Trump's tariffs, which did not raise prices as much as many economists feared, but did appear to weigh on job gains. Hiring in 2025 was the weakest, outside of a recession, since 2002.
Political stakes
For President Donald Trump, the political risks are significant. Surveys suggest many Americans remain pessimistic about the economy, citing the cumulative impact of years of higher prices.
Despite White House claims of a “golden age” for the US economy, public sentiment has been slow to improve.
A sustained rise in petrol prices — a highly visible barometer of inflation — could deepen that dissatisfaction.
“People want the focus to be on the cost of living,” Jacquez said. “If gas prices rise again, that will reinforce concerns that everyday essentials are becoming harder to afford.”
For now, much depends on whether the conflict remains contained. If it does, the economic shock may be fleeting.
If not, the US economy could face another test at a delicate moment.
