As Iran war disrupts oil prices, consumers could be ‘hammered,’ economist says

A New York Federal Reserve survey released Monday found that consumers expected inflation to be lower in the year ahead, and households, overall, said they were better off than a year ago. The New York Fed’s monthly Survey of Consumer Expectations was fielded from Feb. 2 through Feb. 28.

That same day, the U.S. and Israel attacked Iran, causing the biggest oil supply disruption in history. U.S. crude prices soared more than 35% as a result, recently notching the biggest weekly gain since the futures contract began trading in 1983. 

U.S. oil prices went on to hit a high of $119.50 on Monday, and the national average gasoline price topped $3.50 a gallon as of Tuesday, up 21% from a month ago, according to AAA.

Though U.S. oil prices dropped below $90 per barrel Monday afternoon and continued to slide on Tuesday, they remain far above the near $60-per-barrel level where they started the year.

However, experts say surges in energy costs have fed into longer-term inflation fears.

“Consumers threaten to be hammered by the surge in oil prices, which has already lifted the cost of a gallon of gas by 50 cents,” Mark Zandi, chief economist at Moody’s, told CNBC. 

“If oil prices stay near current levels of $100 per barrel, gasoline will be closing in on $4 a gallon by this time next week. Inflation will quickly accelerate, cutting into consumers’ purchasing power, and hitting consumer spending, GDP and jobs,” Zandi said.

“Rising oil prices have a direct and immediate impact on consumer costs, and not only at the gas pump,” said certified financial planner Stephen Kates, a financial analyst at Bankrate. “Unlike last year’s higher tariffs, which took months to filter meaningfully into prices, increases in oil prices are quickly reflected,” he said.

“An immediate spike in gasoline prices strains household budgets and also raises the cost of shipping, airline tickets, and products that rely on oil-based inputs,” Kates said.

Renewed inflationary pressures in the wake of the joint U.S.-Israel strike also helped push the yield on the benchmark 10-year Treasury up more than 4 basis points to 4.173%. The yield on the 10-year note is a barometer for mortgage rates and other types of loans.

Most Americans’ largest liability is their home mortgage. The average rate for a 30-year, fixed-rate mortgage rose to 6.14% as of Monday, up from 5.99% at the end of February, according to Mortgage News Daily.

San Francisco Federal Reserve President Mary Daly also told CNBC on Friday that higher prices at the gas pump, coupled with “inflation printing above target,” create an even more challenging environment for everyday Americans. “I don’t think it really feels comforting to consumers,” she said.

In the face of geopolitical upheaval, inflation pressures and an unclear outlook for tariffs and fiscal policy, Federal Reserve officials will meet next week and announce a decision on interest rates. The Fed’s benchmark also has a ripple effect on many of the borrowing and savings rates Americans see every day.

“The uncertainty created by the turmoil in the Middle East will ensure the Fed puts any changes on monetary policy on hold until policymakers can better gauge whether the inflation or growth effects of the fallout are predominant,” Zandi said. “Higher oil prices are another negative supply shock, lifting inflation and hurting growth, putting the Fed in a no-win situation.”

Futures market pricing is implying almost no chance of a rate cut, according to the CME Group’s FedWatch gauge.

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