U.S. Economy Could Face Demand Destruction Over Continued Economic Impact Of Iran War

A new report claimed that the continued impact of the Iran war will put the U.S. economy through demand destruction, a process in which prices rise so sharply that households and businesses are forced to change how they spend, work, travel, and invest.

The report, published by CNN, warned that the conflict could “rattle or break” the U.S. economy if the blockage of the Strait of Hormuz continues to disrupt global oil and cargo shipments.

In the United States, the impact is landing first at the pump. The Bureau of Labor Statistics said energy prices rose 10.9% in March, led by a 21.2% jump in gasoline, the largest monthly increase in the gas index since the series began in 1967. Overall inflation rose 3.3% from a year earlier.

CNN cited Joe Brusuelas, chief economist at RSM US, who warned that “time is not the ally of the American economy.” He argued that energy is embedded in almost every aspect of the economy, meaning that its impact was large ripple effects. Higher oil prices raise costs for commuting, shipping, farming, flying, manufacturing, and grocery delivery, among others.

RSM economists also warned that first, oil will act like an extra tax on households and businesses. Consumers then could delay purchases, and businesses cut down on costs as a result. If oil-driven inflation keeps rising, the central bank may have less room to cut interest rates and could be forced to stay restrictive, deepening pressure on consumers and businesses.

CNN also highlighted how the oil shortage is impacting regular people. Bryan, a 30 year-old auto industry engineer, told the outlet that he is driving less, working from home when possible, cutting back on social outings, and shelving plans for a kitchen remodel and a V8 car. Another worker driving for Uber said higher fuel costs have forced him to reject longer rides and buy more store brands.

Sian, a 59-year-old woman in Phoenix, also told CNN she has stopped retirement contributions, cut groceries, and canceled medical appointments. Oxford Economics has warned that oil prices around $140 a barrel for two months could push parts of the global economy into a mild recession. Brent Crude oil, the international benchmark, jumped by more than 5% on Monday to $114. West Texas Intermediate, the U.S. benchmark, stood above $105.

The International Energy Agency has described the conflict as the “most severe oil supply shock in history” and warned that “demand destruction will spread as scarcity and higher prices persist.” The agency now expects global oil demand to decline this year, reversing earlier projections of growth.