While the humanitarian impacts of the recent Israel-Iran conflict – now with US intervention – are notable, the global and US economic impacts will be limited in the near term.
The most readily apparent economic impact of the clash is a rise in Oil Prices. Higher energy costs can compound elevated inflation and have the potential to crowd out consumer spending in other areas if the jump in Prices is large enough. However, the impact on pricing thus far has paled in comparison to several recent precedents – including the 2022 Russian invasion of Ukraine (which, we should note, occurred at a time when the dual stimulative effects of very low interest rates and fiscal stimulus were leading to robust economic growth, a markedly different situation from today). In that case, economic fundamentals reasserted themselves and Oil Prices dropped to their pre-invasion levels despite the war grinding on.
Oil Price results are on track to come in at, or even slightly below, the midpoint of our forecast range (3-month moving average) for June. The daily price, which is currently around $70 per barrel, is always more volatile than the monthly price, which is, in turn, always more volatile than the quarterly price. A daily Price around $70 in the immediate aftermath of the US strike is consistent with our forecast. We had been expecting Oil Prices to rise in the back half of 2025 and into 2026; this is still the case.
It is possible the uncertainty may increase the odds that we see results track the upper end of the forecast range or even lift the forecast if supply is severely disrupted. However, that upside threat must be counterbalanced against a variety of downside threats, including:
The FOMC is unlikely to make a knee-jerk reaction to the conflict at this stage. Higher energy costs will add to inflationary pressures, potentially bolstering the argument against rate cuts in upcoming meetings. ITR Economics maintains its position that significant rate cuts are unlikely and that long-term rates are at or near their lows for the current cycle.
Geopolitical conflict breeds uncertainty and poses a risk to global economic growth. At this juncture, the greatest risk would entail escalation and/or geographical broadening of the war. Global supply chain pressures have abated in recent quarters, and while the risk to specific trade routes is present, most disruptions to global trade appear temporary. Expansion of the scope of conflict or new entrants could pose additional economic risks.
Stay tuned with us and we will continue to update you on how current events are likely to impact the economy and our clients.