Consumers are expected to pull back on spending as the US-Israel war on Iran causes pain at the gas pump, with a new Oxford Economics analysis forecasting 2026 will bring the slowest annual consumption growth since 2013, excluding the pandemic.
Higher tax refunds had been expected to lift consumer spending. Now, “the rise in gasoline prices, if sustained, would more than offset that boost,” with prices now approaching $4 per gallon, according to Bernard Yaros and Michael Pearce of Oxford Economics.
Headline inflation, too, will head higher again, the economists wrote.
Read more: How oil price shocks ripple through your wallet, from gas to groceries
And, “the longer the shock lasts, the more likely it is that higher prices will pass through to core inflation,” which strips out volatile categories like food and energy, Yaros and Pearce said. Still, they added, “inflation is not as broad-based as it was four years ago and will be a far cry from its alarmingly high rates following the outbreak of the Russia-Ukraine war.”
Like many other economic trends in the past year, though, there will be a “K-shaped” dynamic in the war’s consumer impacts: Lower- and middle-income consumers spend a higher percentage of their budgets on gas, meaning they’ll feel price increases more acutely than high-income households.
“All told, we’re only a few weeks into the Iran war, so the incoming economic data only reflects the prewar economy,” Yaros and Pearce wrote, adding that “March data on retail sales, consumer prices, and other measures will begin to reveal the war’s impact on consumers.”
The fallout won’t be contained to gas prices. Sameera Fazili, who led the Biden White House’s supply chain disruptions task force, warned that energy price shocks in Asia will also hit US manufacturers, who rely on overseas components. That could further burn consumers.
“We can anticipate price increases, as well as outright shortages of some products,” Fazili said on a Friday call with reporters. “The question is just going to be about magnitude and timing of that impact.”
Emma Ockerman is a reporter covering the economy and labor for Yahoo Finance. You can reach her at emma.ockerman@yahooinc.com.
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