Middle East conflict threatens to exacerbate inflationary pressure on
some things
[June 14, 2025] By
MATT OTT
Israel's attack on Iran Friday has catapulted their long-running
conflict into what could become a wider, more dangerous regional war and
potentially drive prices higher for both businesses and households.
Oil and gold surged and the dollar rose as markets retreated, signaling
a flight to investments perceived as more safe.
After years of sky-high inflation in the aftermath of the COVID-19
pandemic, Americans have become increasingly leery about the economy
this year due to President Donald Trump's sweeping tariffs, though the
impact so far has been muted.
The latest escalation in the Middle East has the potential to cause
widespread price increases that could set consumers back again.
Here's a look at some of the sectors that could face an outsized impact
from the escalation in the Middle East, and what that might mean for
consumers.
Energy
Oil prices surged Friday to their biggest gain since the onset of
Russia's war on Ukraine began more than three years ago. If or when
Israel's attack on Iran could impact gas prices, which have been in
decline for nearly a year, isn't entirely clear.
Iran is one of the world’s major producers of oil, though sanctions by
Western countries have limited its sales. If a wider war erupts, it
could significantly slow or stop the flow of Iran’s oil to its
customers. Energy prices have been held in check this year because
production has remained relatively high, and demand for it low. A
widening conflict could tilt that balance.
“The loss of this export supply would wipe out the surplus that was
expected in the fourth quarter of this year,” analysts for ING wrote in
a note to clients.
In the past, conflicts in the Middle East have sent energy price soaring
for extended periods but in recent years, because of the huge supply of
oil, those spikes have been more fleeting.
Earlier this month, the countries in the OPEC+ alliance decided to
increase production again, which often pushes crude prices down. They
hit a four-year low in early May. That usually means cheaper gas, of
which there is currently a surplus.
According to the auto club organization AAA, the average price for a
gallon of gas in the U.S. on Friday was $3.13 per gallon, down from
$3.46 a year ago.
Shipping
Shipping costs were already on the rise for a number of reasons. Cargo
is being rerouted around the Red Sea where the U.S. began conducting air
strikes on Yemen’s Houthis, the Iran-backed rebels who were attacking
ships on what is a vital global trade route. And this year, companies
have scrambled to import as many goods as possible before Trump’s
tariffs kicked in, pushing demand, and prices to ship, higher.
The Baltic Dry Index, a key indicator of dry bulk shipping demand that
tacks the movement of coal, iron ore, grains and more, is hitting
eight-month highs.
The window for companies seeking to ship goods before the year's end is
coming to a close this month. A widening conflict in the Middle East
would only drive prices higher as those companies jostle to get goods
from overseas as geopolitical tensions in the region rise.
Shares of ocean shipping companies like Teekay and Frontline rose
sharply following Israel's attack.
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A worker takes a photo under the start of the Trans-Alaska Pipeline
after a news conference at the Pump Station 1 on Monday, June 2,
2025, located near Deadhorse, Alaska, on the state's prodigious
North Slope. (AP Photo/Jenny Kane)
 Consumer goods
Higher energy prices can lead to elevated costs for a wide range of
products because just about everything is made and transported using
oil or natural gas.
Government data this week revealed that Trump's tariffs have yet to
cause a broader rise in inflation. Still, many companies have
announced price hikes due to the tariffs. Walmart has already raised
prices on some goods and said it will do so again as the
back-to-school shopping season begins. J.M. Smucker, largely due to
the impact of tariffs on coffee from Brazil and Vietnam, said it's
also raised prices and will do so again. Combined with the higher
shipping and production costs that could result from the escalated
Middle East conflict, prices will almost certainly rise further,
analysts say.
“Inventory buffers may have allowed firms to put off decisions
about raising prices, but that won’t be the case for much longer,”
the ING analysts said. “We expect to see bigger spikes in the
month-on-month inflation figures through the summer,” they added,
noting that The Fed’s recent Beige Book cited widespread reports of
aggressive price hikes already in the pipeline.
Federal Reserve
Federal Reserve officials meet next week to make their next
interest rate decision, and the vast majority of economists still
think the U.S. central bank will leave its benchmark rate where it
is for the fourth straight time. The Fed has been juggling its dual
mandate of supporting the labor market while keeping inflation at
bay. That goal may become increasingly difficult to achieve if
prices for gas, food and other essential rise due to the Israel-Iran
conflict.
If prices go up, Fed officials may be inclined to raise its
benchmark rate, raising borrowing costs for businesses and
consumers. That could lead to businesses to cut jobs, particularly
in the high-growth tech sector, and force Americans to pull back on
spending, which drives more than 70% of economic activity in the
U.S.
Shares of tech companies and retailers were among the biggest
decliners Friday.
Travel
Perhaps contrary to conventional wisdom, one cascading effect of
the heightened Middle East tension may be that the cost of
traveling, even if fuel prices rise, will come down.
Airlines have been downgrading their travel forecasts as businesses
and families tighten their travel budgets in anticipation of
tariff-related price hikes. Several major air disasters also have
made some wary of getting on a plane.
Most major U.S. airlines have said they plan to reduce their
scheduled domestic flights this summer, citing an ebb in economy
passengers booking leisure trips. Last month, Bank of America
reported that its credit card customers were spending less on
flights and lodging.
And because of the Trump tariff wars, the dollar has fallen almost
10% this year when measured against a basket of foreign currencies,
making it more expensive for Americans to travel abroad due to
unfavorable exchange rates.
On Friday, shares of major U.S. airlines were in sharp retreat.
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