Is the Iran war quietly making life more expensive in America? | EXPLAINER

The ongoing Iran war has triggered a sharp rise in global oil and gas prices, pushing energy costs in the United States to their highest levels in four years. The surge has reignited inflation concerns, reduced the impact of wage growth for many workers and deepened anxiety among consumers already struggling with high living costs.

While the economic pressure is becoming increasingly visible, the broader American economy has so far remained relatively resilient. Consumer spending continues, businesses are still hiring and overall economic growth has not collapsed. However, economists warn that if the Strait of Hormuz remains blocked and energy prices stay elevated, the strain on households could intensify further in the coming months.

Why the Strait of Hormuz matters

The Strait of Hormuz is one of the world’s most important oil shipping routes. A large share of global crude oil and liquefied natural gas passes through the narrow waterway.

Ongoing tensions linked to the Iran conflict have disrupted shipping through the region, creating fears of prolonged supply shortages. As a result, fuel prices have surged worldwide, including in the United States.

Higher fuel costs affect almost every part of the economy because transport, manufacturing and food supply chains all depend heavily on energy.

US economy still growing despite pressure

The broadest measure of the American economy, gross domestic product or GDP, continues to show growth. The US economy remains massive, valued at around $31 trillion, and has not yet shown signs of a major slowdown.

However, GDP figures are backward-looking. The latest available numbers cover the first quarter of the year, which included only one full month of the Iran conflict. Economists say the real impact may become clearer in later data.

Job market remains stable for now

Employment figures in the early months of the conflict remained unexpectedly strong. Job creation continued steadily, while unemployment stayed low.

March recorded the strongest monthly job growth in nearly two years, outperforming economists’ forecasts. However, analysts cautioned that some of the gains were influenced by temporary factors, including recovery from a government shutdown and the end of major labour strikes.

Even so, there are signs that the labour market is beginning to cool gradually.

Americans continue spending

Retail sales remained strong through March and April, despite rising fuel costs. Spending was partly boosted by higher petrol prices, but consumer purchases also increased in categories unrelated to energy.

Economists closely monitor a category known as the “control group”, which excludes volatile items such as petrol. In April, this category still rose by nearly 0.5 per cent, indicating that consumers continued to spend on goods and services even amid inflation worries.

This suggests that many households have not yet sharply cut back on daily spending.

Inflation rising again

Inflation climbed to a three-year high in April, driven mainly by rising fuel costs. However, price increases are now spreading into other sectors of the economy as well.

Food prices increased 3.2 per cent over the past year, while airfares jumped by 20.7 per cent.

The return of rising inflation has become especially painful for Americans because the country only recently emerged from its worst inflation crisis in four decades.

Pay rises no longer keeping up

For much of the past three years, wage growth had been stronger than inflation, allowing workers to slowly recover purchasing power lost during earlier price spikes.

That changed last month.

Inflation began rising faster than average wages, meaning many Americans effectively lost the benefit of their annual pay increases. In simple terms, salaries are no longer stretching as far as they did a year ago.

As a result, some households are being forced to dip into savings or rely more on debt to cover everyday expenses.

Lower-income families feeling the biggest impact

The economic strain is not affecting all Americans equally.

According to the Bank of America Institute, higher-income households are still seeing wage growth comfortably outpace inflation. Their earnings increases have more than compensated for rising fuel prices.

Lower-income Americans, however, are facing greater difficulty. For many families, salary increases are barely enough to offset higher petrol costs alone, leaving less money available for food, rent and other necessities.

Housing market faces fresh challenges

The financial markets are also reacting to renewed inflation fears.

Strong corporate profits and growing demand linked to artificial intelligence have helped push stock markets to record highs. However, the bond market has weakened because investors expect inflation to remain elevated.

This has pushed the benchmark 10-year US Treasury yield to its highest level in over a year.

Higher bond yields often lead to increased mortgage rates. Economists warn that this could further freeze the housing market, making it even harder for many Americans to afford homes.

Why consumer confidence is falling

Despite solid economic indicators such as GDP growth and low unemployment, public sentiment in the United States has weakened sharply.

Many Americans continue to feel frustrated by the high cost of living. Even though inflation today is lower than the extreme levels seen in 2022, people are still adjusting to permanently higher prices for everyday items.

The sense of financial discomfort has persisted because ordinary purchases, from groceries to restaurant meals, remain significantly more expensive than they were a few years ago.

With energy costs continuing to rise and uncertainty surrounding the Iran conflict unresolved, economists say consumer pressure could increase further if oil markets remain unstable.