The first economic effects of the escalating conflict between the United States and Iran showed up in the most ordinary place: the gas pump.
“You and I are going to feel it,” economist Justin Wolfers said, warning that higher oil prices could soon push up the cost of gasoline for American households.
Wolfers said the conflict could ripple through energy markets and everyday expenses, adding that rising oil prices could “lead households to pay more for longer” if disruptions last beyond the immediate aftermath of the strikes.
Oil Prices Are The First Place Americans Will Notice
In a recent video explaining the economic implications of the conflict, Wolfers emphasized that economics may not even be the most important issue during a war.
“The economic lens may not be the most important lens at a moment like this,” he said, noting that security, ethics and humanitarian concerns matter far more.
Still, he said economic signals can help explain what Americans might experience in their day-to-day finances over the coming weeks and months, particularly as rising oil prices typically pass quickly through to gasoline costs.
Financial markets reacted immediately after the strikes. The S&P 500 briefly fell about 1% when trading reopened, although markets soon recovered those losses.
According to Wolfers, that reaction suggests investors see a potential economic impact but not a major economic collapse.
“Markets were rattled but not for long,” he said.
The more important signal came from oil futures markets. Those prices jumped roughly 8% immediately after the attack, reflecting expectations that energy supplies could tighten if tensions escalate in the Middle East.
Because gasoline prices closely track oil prices, that jump could translate into a noticeable increase at the pump.
Wolfers explained that historically, “when oil prices rise by 10%, typically gas prices rise by 10%.”
With gasoline prices recently around $3 per gallon in many parts of the country before the conflict, the jump in oil prices has pushed prices up by more than 30 cents per gallon in many areas.
For many families, that change may not seem dramatic at first glance. But over time it adds up.
The typical American household uses about 1,000 gallons of gasoline per year.
With prices already rising by more than 30 cents per gallon in many areas, that increase could mean roughly $300 or more in additional annual fuel costs for the average household if the higher prices persist.
“Not the end of the world,” Wolfers said. “But it’s real money, especially for families that are stretched.”
Why This Isn’t The 1970s Oil Crisis
Some observers fear that rising oil prices could trigger a repeat of the stagflation era of the 1970s, when the United States experienced both high inflation and a weak economy after oil shocks from the Middle East.
Wolfers said that comparison misunderstands how much the U.S. economy has changed.
During the 1970s, the United States depended heavily on foreign oil imports. That meant rising global oil prices effectively made the country poorer and squeezed economic growth.
Today the situation is very different.
The United States now produces roughly as much oil as it consumes and is technically a net exporter of petroleum products. That structural change reduces the economic damage from energy price shocks.
“What’s different today is actually the U.S. is technically a net exporter of petroleum products,” Wolfers said.
As a result, higher oil prices primarily increase household expenses without severely weakening overall economic output.
Using one of the Federal Reserve’s core economic models, Wolfers examined what might happen if oil prices increase significantly.
The model suggests that a $10 rise in oil prices would push headline inflation up temporarily by about 0.4 percentage points. However, the impact on core inflation, which excludes volatile energy prices, would be minimal.
More importantly, the model predicts only tiny changes in economic growth and employment.
According to Wolfers, the effects on unemployment would be extremely small, measured in hundredths of a percentage point.
“The effects on the real economy are very small,” he said.
That means the shock looks more like a short-term inflation spike instead of a widespread economic downturn.
“You should think about this shock as being inflation but not stagflation,” Wolfers said.
The Bigger Risk Could Come From The Federal Reserve
While higher gasoline prices may be the most immediate consequence, Wolfers said the more important long-term risk involves the Federal Reserve’s response.
If higher energy prices push inflation higher, policymakers could feel pressure to keep interest rates elevated.
Financial markets already appear to expect a slightly tighter monetary policy. Futures markets suggest interest rates could end up a bit higher than previously expected over the coming months.
That possibility creates a second economic channel where the conflict could affect Americans.
If the Fed keeps borrowing costs high in an effort to control inflation expectations, that policy stance could weaken hiring and investment.
In that case, the war’s economic effects would spread beyond gasoline prices.
But Wolfers said the biggest unknown is how long oil prices remain elevated.
If the conflict escalates or disrupts shipping routes like the Strait of Hormuz, energy prices could climb even higher.
Oil prices have already surged above $90 per barrel as the conflict escalates, and analysts warn they could climb toward $100 or higher if disruptions to Middle East energy supplies persist.
That kind of prolonged disruption would increase inflation pressures and make it harder for policymakers to ignore the spike in energy costs.
“That’s going to lead households to pay more for longer,” Wolfers said.
For now, however, markets appear to expect a temporary shock.
Wolfers emphasized that the situation could change quickly depending on geopolitical developments.
“There’s about a million things that could happen,” he said.
For the moment, the early economic picture is relatively clear. Oil prices are rising, gasoline costs will likely follow, and households will feel the impact.
But whether those costs stay elevated, and how policymakers respond, will determine how significant the economic consequences ultimately become.