If you were to ask a regular consumer what a barrel of crude oil costs, they likely wouldn’t know the exact figure. Ask them how much it takes to fill up their car with a tank of gas, on the other hand, they might remember down to the cent.
The visibility of oil price rises in the mind of U.S. consumers is ultimately the factor that will move the needle on the health of the U.S. economy, warns Wharton’s Professor Jeremy Siegel. Indeed, when consumers begin to raise their price expectations is when Wall Street will really begin to worry.
So far, despite the geopolitical consternation in the Middle East since the U.S. and Israel launched strikes on Iran, markets have been volatile but haven’t spiralled too far downward. This is partly because traders, worried about sustained disruption to supply out of the Gulf region, have been betting on hopes that President Trump’s action in Iran will conclude within a matter of weeks.
But the headlines are beginning to trickle into the wallets of U.S. consumers, which is when the knock-on effects of inflation expectations and wage-price spirals (when workers demand higher pay to finance an increased cost of living, pushing up business costs in turn) kick in.
This consumer psychology is the real issue when evaluating the impact of the Middle East conflict, wrote Professor Jeremy Siegel, emeritus professor of finance at the University of Pennsylvania and senior economist to WisdomTree. Writing for the financial platform in a note released yesterday, Professor Siegel noted the key issue is not crude oil: “It is gasoline, the most visible price in the economy for consumers, and when that price jumps it hits psychology immediately.”
Already, Western consumers have been urged not to panic-buy gas in a bid to get ahead of rising prices. The U.S., unlike some of its allied nations, sits on healthy oil reserves, giving it a safety net not afforded to many smaller economies. And the White House has confirmed that for a limited period of time, sanctions on Russian oil will be lifted to increase supply into the market.
However, despite the political furore around affordability in the run-up to the mid-terms, Treasury Secretary Scott Bessent indicated his department can’t and won’t intervene in certain areas if prices spike too high. He told CNBC this week that rumours the administration may intervene in the futures market or use other mechanisms to bring down prices is mere speculation, adding: “When there’s big dynamic price action, that always happens. We haven’t done that.”
The psychology of consumers is what matters, added Siegel: “Even if the broader economic effect is more balanced than the headlines. Imports are getting cheaper with a stronger dollar, and higher oil is also boosting profits in the energy sector. That is the practical benefit of energy self-sufficiency. The consumer feels the pain first, but the economy has offsets that did not exist to nearly the same degree in earlier oil shocks.”
Uncertainty is on the rise, he continued: “The market ended last week with a more cautious tone as rising oil and the widening Middle East conflict bring a fresh layer of uncertainty. I could see the markets experiencing a 10% correction from the recent highs. We are not anticipating a major decline for the S&P 500, but the mood has clearly changed.”
Consumer impact
If consumers are wondering about a pinch, then so too is the Federal Open Market Committee (FOMC), which meets this week. The rate-setting group is widely expected to leave the funds rate unchanged, though dissent is likely to come from the likes of Governors Bowman and Miran.
Indeed, Goldman Sach’s Devid Mericle wrote to clients this week that he expects the FOMC’s statement to say “the war with Iran has increased uncertainty about the outlook and will likely raise inflation and weigh on economic activity in the near term.”
He also noted the Summary of Economic Projections from the Fed for 2026 is likely to change, with GDP marginally down to around 2%, the unemployment rate to nudge higher above 4.5%. and headline inflation to stay above the 2% target.