The US-Iran conflict centered in the Middle East is sending economic shockwaves across America. As tensions escalated and the crucial oil route through the Strait of Hormuz came under pressure, fuel prices began a volatile climb, pushing inflation higher, squeezing household budgets, and dragging US consumer sentiment to a record low.
Fuel Prices at Four-Year Highs
Fuel prices in the United States surged to four-year highs, effectively erasing the average pay gains Americans had achieved over the past year. Despite this growing pressure on households, the broader US economy has so far remained resilient, though cracks are beginning to show.
Economic Activity Still Expanding
Economic activity continues in expansion mode, with consumer spending staying firm and hiring trends largely holding steady. Gross domestic product, the broadest measure of economic growth, expanded at a solid pace during the first quarter. However, these data reflect only one full month of the Iran war, leaving uncertainty over how prolonged disruptions in energy markets could affect growth in the months ahead.
Job Market Remains Resilient
The labor market has been one of the strongest pillars of the US economy during the conflict. Employment continued to grow through the first two months of the war, while unemployment remained low. March recorded the strongest monthly job growth in two years, catching economists off guard after expectations of softer hiring. Analysts noted, however, that some of this strength was linked to temporary factors, including recovery following the government shutdown and the effects of major labor strikes.
Consumer Spending Holds Up
Consumers have continued to spend even as higher fuel prices increased pressure on household finances. Retail sales rose sharply in March as surging petrol prices lifted overall spending figures before stabilizing in April. Even after excluding gasoline from the figures, spending still posted modest growth. The control group, which removes volatile categories such as fuel, increased by just under 0.5% in April, suggesting that consumer demand has remained relatively stable despite inflationary pressures.
Inflation Returns to Center Stage
Inflation has accelerated sharply again, largely driven by rising energy costs. Consumer prices touched a three-year high in April, with the impact now spreading beyond fuel into other parts of the economy. Food prices climbed 3.2% over the past year, while air fares surged 20.7%, adding further stress to household budgets already dealing with elevated living costs. The renewed inflationary pressure has reignited frustration over the economy. Many Americans are still recovering from the steep price shocks of the recent inflation crisis, and the latest rise in everyday expenses has kept consumer sentiment weak.
Wage Gains Disappear Under Rising Costs
For much of the past three years, wage growth had stayed ahead of inflation, helping households absorb higher prices. That trend reversed last month as inflation once again began rising faster than wages. For the first time since 2023, annual price increases overtook pay growth, effectively wiping out average wage gains. As a result, many middle- and lower-income households are increasingly relying on savings or debt to maintain spending. The burden, however, has not been equal across income groups. According to the Bank of America Institute, higher-income earners have continued to see wages comfortably outpace inflation. Their annual pay rises were enough to offset the increase in gas prices 17 times over, while lower-income workers saw wage gains that barely covered fuel costs alone.
Markets Signal Deeper Inflation Worries
Financial markets are also beginning to reflect growing anxiety around persistent inflation. Stock markets have continued to touch record highs, supported by strong artificial intelligence demand and rising corporate profits. Bond markets, however, have weakened as investors grow more concerned about inflation staying elevated for longer. The benchmark 10-year US Treasury yield has climbed to its highest level in more than a year. Higher bond yields could also push mortgage rates further up, worsening affordability pressures in the housing market and making home ownership even more difficult for many Americans.
