April, 2026
The war with Iran has whipsawed markets and created significant economic uncertainty.
A fragile ceasefire is now in place, and both sides have strong incentives—human, economic, and political—to avoid a prolonged escalation. While negotiations appear to be gaining traction, the risk of renewed hostilities and the ultimate extent of infrastructure damage remain uncertain. As a result, both the near- and long-term economic impacts are difficult to quantify and subject to a wide range of outcomes.
Energy markets have responded swiftly. A disruption to a meaningful share of global oil and natural gas supply from the Middle East has driven prices sharply higher, with gasoline, diesel, and jet fuel costs immediately rising. While some of these increases are very obvious, others will filter through the economy over the coming months. Increased energy costs act as a tax on consumers and businesses, reducing money to be spent elsewhere and weighing on growth, while also complicating the inflation outlook.
High energy prices, however, are not as economically damaging as they once were. Consumer spending on gasoline and other motor fuels amounted to 1.5% of personal income last year, down from 2.8% in 2008. Even with a gallon of regular gasoline averaging over $4 nationwide, drivers are paying considerably less for fuel today than at various points in the past when adjusted for inflation. Additionally, total U.S. petroleum product consumption is lower today than it was twenty years ago, and the country has been a net exporter since 2020. Nevertheless, sharply higher energy prices still tend to have a negative psychological impact on consumer behavior.
This backdrop helps explain the Federal Reserve’s current stance on interest rates. Chair Jerome Powell has indicated that energy disruptions tend to be short-lived, suggesting a willingness to look through near-term price increases. Prior to the conflict, markets were pricing in rate cuts later this year. That expectation briefly shifted toward potential rate increases following the initial spike in oil prices, but consensus has since stabilized around a prolonged pause well into next year. Given the fluidity of the situation, the path of monetary policy remains an open question.
Price pressures are also emerging beyond energy. Fertilizer prices have spiked, as a significant portion is produced in the Middle East. Higher costs from maritime freight disruptions, combined with lower crop yields, are likely to push some food prices higher later this year. About one-fifth of aluminum imported into the U.S. comes from Gulf countries, and facilities belonging to two of the region’s largest producers were damaged by drone and missile strikes, driving prices higher. The cost of low-density polyethylene, a widely used plastic, has surged by as much as 55% due to reduced petrochemical production stemming from the war. These examples of evolving supply chain disruptions may take time to normalize.
The U.S. economy was healthy prior to the conflict and, in many ways, is better positioned than other economies to absorb current price shocks and supply constraints. In a best-case scenario, oil and gas shipments from the Middle East could take weeks to return to prewar levels, while other commodities may take longer to stabilize.
For markets, corporate earnings remain the primary driver of long-term returns, and underlying growth trends continue to be robust. Additionally, a meaningful portion of the inflation currently being experienced could dissipate if supply conditions improve. While a durable resolution to the conflict may be complex and take time, a halt to hostilities can jump-start the economic healing process for all sides. History tells us that most wars in recent decades have had few effects on financial markets a year after fighting ended. A similar pattern could emerge here.
