After one week of war in the Middle East, it seems appropriate to take stock of what it all means.
Imbalance
First, the economic imbalances among households across the American economy will become a searing focal point should this conflict endure.
With the price of West Texas Intermediate, the North American benchmark for oil, rising by about 60% since December and by 36% over the past week, expect a hue and cry from down-market households that simply never recovered from the inflation shock of 2022.
These households will face another period of economic stress as the price of everything touched by energy increases.
It is highly probable that gasoline prices will be up by 50 cents in the next couple of days, which would represent a 15% increase over the pre-war level.
Is there an affordability crisis? Arguing otherwise might not be wise.
The dollar
Second, anyone who suggests that the U.S. should voluntarily relinquish the dollar’s status as the world’s reserve currency, and the financial power and hegemony that come with it, should be questioned.
The dollar recently appreciated against 15 of the 16 major trading currencies as global investors sought a haven amid rising tensions.
Absent that haven status, there would have been a destabilizing unwind across American financial markets and asset classes in a way not beneficial to those with higher incomes and those with lower incomes alike.
A weak dollar policy is simply not in the interest of the U.S. economy. Following this crisis, Washington needs to get serious about putting its fiscal house in order to ensure that the dollar hegemony endures.
Inflation
Third, the inflation metric that the Fed uses for its monetary policy will come in hot when it is published on March 13 because of a combination of rising goods and sticky inflation prices.
Rising energy prices will contribute at least a 0.4% bump to top-line inflation in the March data. Should that prove temporary, the Fed will look through it.
Should the war in Iran last, though, the central bank will face the combined threats of rising inflation, slower growth and an increase in unemployment driven by firms choosing to shed labor as an energy shock drives the cost of business higher.
Energy prices
Fourth, the spike in oil and natural gas prices will affect all companies in general, and small and medium sized companies in particular. The Russell 2000 index was down by almost 4% and the Russell 3000 fell by 2% this past week; they are proxies for small-cap firms that will absorb another energy shock.
The tariffs question
Fifth, forward-looking fiscal policymakers might want to begin talking about reducing tariffs on transportation, manufacturing and food-producing firms that will experience a price shock.
Sometimes it is useful to say what everyone is thinking. Asking our allies to absorb an energy shock and physical damage to their cities as we pursue our national interests may not be the time to impose a global 15% tariff on them and our trading partners.
Expect talk of the rising cost of jet fuel—which has doubled over the past year—and rising food prices to be translated into rising travel and grocery prices in the March consumer price index.
Should the price per barrel of oil, cost of gasoline and inflation approach our thresholds of $125 per barrel, $4.25 per gallon of gasoline and 4% inflation, the U.S. economy will feel the pain quickly.
Should energy costs jump toward those levels, there is a risk that the total cost of absorbing that increase will negate the fiscal tailwind we were expecting from the One Big Beautiful Bill Act of 2025.
The U.S. economy can absorb a large shock, and we are some distance away from those pain points. But it is time to start considering stabilization policy.
