Economic risks are mounting as the Iran war continues. Rising gas prices could be just the beginning

The U.S. war on Iran is already showing up at gas pumps across the country. The national average for a gallon of gas hit $3.48 on Monday, up nearly 50 cents since the U.S.-Israeli strikes on Iran began 10 days ago, according to AAA.

But this sharp spike in prices is likely only to be preliminary. Here’s why.

Why prices are up, and why they aren’t done going up

The first wave of increases is here, and simple enough to understand: When gas stations know their next delivery will cost more, they usually raise prices preemptively, before the more expensive fuel even arrives. The result is that pump prices tend to respond to crude spikes faster than the strict underlying supply-chain economics. Thus the 50-cent jump Americans have already seen is the likely just the first wave of the pass-through.

Then comes the real one. While the relationship between crude oil prices and what consumer pay at the pump is not instant, it’s not exactly slow, either. When crude spikes, the increase moves through the supply chain in stages, with refineries paying more for oil, then charging more for the refined product, distributors passing that increase through to stations, and finally, stations pricing the increase at the pump. The process can take days or as long as week.

The underlying crude move since the beginning of the war has been so large — about 70% in a week — that the supply chain may take a little longer than usual to digest it. This is why some experts are predicting gas will rise to $4 or even $5 a gallon over the next few weeks, even as G7 governments are actively discussing offramps.

Inflation risks and GDP risks

But eye-popping tallies at the pump are themselves likely only the beginning of the effects on consumer prices.

That’s because oil is an input cost for freight, fertilizer, manufacturing, and air travel, which means a sustained energy shock has the potential to embed itself in the price of nearly everything Americans buy over the next several weeks and months. This week’s CPI print won’t capture those effects because it provides a read on data collected in February.

Some widely followed market analysts are already projecting that if oil prices remain near or rise from current levels, and stay elevated for several months, U.S. inflation could climb to over 3%, erasing years of hard-won Federal Reserve progress. That would likely leave the Fed unable to cut rates in coming months, no matter if the larger economy is slowing or not.

That larger economic piece is also in focus as experts and commenters begin to track the costs of the U.S. attack on Iran. The Atlanta Fed’s GDPNow model, which had been tracking around 3% growth through late February, dropped sharply to 2.1% as the war began. That number partially captures the anticipation of a shock — markets seizing up, trade flows disrupted, some foreign economies thrown into chaos.

What it cannot yet capture is a potentially sustained drop in consumer spending if $5 gas becomes normal, and associated costs rippling through the nation, sector by sector, from manufacturing to agriculture and tourism. But a reasonable guess says that, if oil stays above $100 for weeks, recession stops being a closely watched (if tail) risk and becomes a more urgent question.

The larger potential cost of the war and the fallout

The war news and its associated costs are landing on an American public that wasn’t consulted and, according to polls, largely does not want it. The administration’s stated rationale has shifted almost daily from imminent nuclear threat to regime change to regional security.

And here is where the pain at the pump and political dismay really sets in, because none of this is new. The U.S. has spent between $6 trillion and $8 trillion on post-9/11 wars in Iraq, Afghanistan, Syria, and across the broader Middle East, according to estimates from Harvard’s Kennedy School of Government and Brown University’s nonpartisan Costs of War project.

The human toll is, of course, far worse. Nearly one million people died from direct war violence. Nearly 4 million more died from indirect effects — people, most of them civilians, dying as a result of economic collapse, destroyed health infrastructure, starvation, and recurring violence. Nearly 40 million people throughout the region were displaced.

Experts agree that those wars did not accomplish their stated or purported aims, further destabilized the region, dragged on for many years past initial official estimates, and ironically or not, helped create the environment in which Iran began to wield greater regional influence.

And now, with no plan and no coherent stated purpose, the U.S. is doing it all over again. Whether it’s consumer pain at the pump or the larger market’s concern with this war’s duration, the risks are already here.

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