Iran War Sent Prices Higher, and Could Spell Economic Disaster in Midterms

Fuel costs climb sharply

Since the Iran war began in February, oil and gas prices have surged as the Strait of Hormuz was closed. The waterway normally carries about a fifth of the world’s oil supply, and tanker traffic nearly stopped early in the conflict.

Shipments have recovered substantially but remain below prewar levels. Diesel has risen by more than $2.50 over the year to around $6.18 per gallon in the US, according to the Energy Information Administration; in California, it is above $8.

Tensions threaten shipping routes

The Royal Navy-affiliated United Kingdom Maritime Trade Operations Center has reported attacks on several merchant ships in and around Hormuz this month. US Central Command has blamed Iran for some of the strikes.

Inflation lifts borrowing costs

Rising prices have put pressure on the Federal Reserve and bond markets. In September, the central bank raised interest rates for the first time in three years, and another increase could come by year’s end.

The 10-year Treasury yield rose from below 4% at February’s end to a high of 5.31% this month. Over the eight-month conflict, the 30-year mortgage rate climbed from just under 6% to 7.5%.

Affordability looms over midterms

Affordability is a concern for many voters during midterm season, while the economic outlook shows no immediate sign of improving. The pressure could complicate Trump’s effort to bring down gas prices.

The administration also faces renewed attacks by the Houthis, an Iran-backed rebel group in Yemen. The group has seized territory along the Red Sea and increased missile strikes against Saudi Arabia, raising concerns about threats to the Bab al-Mandeb Strait and potential price increases for goods shipped through it.