Iran conflict could worsen America's affordability crisis
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President Trump walks on the South Lawn of the White House on Sunday. Photo: Kyle Mazza/Anadolu via Getty Images
The Iran conflict abroad threatens to worsen the affordability crisis at home, as an oil price spike ripples through to pump prices Americans see every day.
Why it matters: This has become one defining tension of President Trump's second term — foreign policies that could undercut core domestic promises to lower prices for American consumers, just months ahead of midterm elections.
- That tension has been on display with global trade: Trump imposed steep import taxes aimed at leveling the trade playing field, but the result has been higher goods prices for consumer staples.
The big picture: Gas prices have been a deflationary tailwind for Trump. Prices in January were down more than 7% from a year ago, putting downward pressure on overall inflation.
- Turmoil in the Middle East could reverse that trend, though it is still unclear how long any price surge will last, or how steep it might be.
- A $10 rise in crude prices translates into a spike of roughly 24 cents a gallon, according to RSM chief economist Joe Brusuelas.
Zoom in: Gas prices are plastered everywhere, making them the most powerful political and psychological signal about the cost of living. Any spike in prices would compound the pressure on Americans' budgets and further sour their perceptions about the economy.
- For the past half-century, when gas prices rose consumers' overall inflation expectations have followed suit. (That link broke down last year: gas prices declined but consumers still expected higher inflation as a result of high tariffs.)
What they're saying: "We were just starting to have a serious conversation about whether inflation was sticky or merely stubborn," Mark Malek, chief investment officer at Muriel Siebert, wrote in a note to clients. A lasting energy shock could change that narrative.
- "At worst, it actually re-accelerates headline inflation and seeps into expectations. Energy feeds transportation costs. Transportation feeds goods prices. And suddenly, what looked like a steady glide path lower becomes another plateau," Malek added.
What to watch: Gas prices were among the few deflationary sources in the economy where price pressures are apparent on multiple fronts.
- AI-driven electricity demand is raising utility bills across the country.
- Prices for goods, including groceries, have jumped. The White House has promised to lean on other trade authorities to reimpose tariffs rejected by the Supreme Court.
The bottom line: "Voters have already been concerned about the economy and affordability. A sustained increase in oil prices could be a risk for Republican candidates in November," Brian Gardner, chief Washington policy strategist at Stifel, wrote Monday morning.
