As renewed fighting with Iran sends oil and
gas prices soaring, President Trump has imposed new global tariffs that could push
up prices further.
·
Economic
respite ends: After
a brief period of easing inflation, falling fuel prices, and reduced tensions
in the Middle East, the U.S. economy is again facing mounting pressures.
·
Iran
conflict intensifies: The
renewed U.S.-Iran conflict has pushed Brent
crude oil prices to around $100 per barrel, increasing concerns about global energy
supplies.
·
Gasoline
prices rise: U.S.
retail gasoline prices have climbed above $4.10 per gallon in many parts of the country, reversing
earlier declines.
·
New
tariffs announced: The
Trump administration finalized 10%–12.5%
tariffs on imports from more than 80 countries, including Canada, Mexico, and the European Union, under Section 301 of the Trade Act of 1974.
·
Additional
trade actions planned:
o Further Section 301 tariffs are expected
on additional European and Asian countries.
o A 50%
tariff has
been announced on many Canadian goods.
o President Trump also threatened additional
tariffs on the EU over its fines imposed on U.S. technology companies.
·
Inflation
risks increase:
o Higher oil prices and new import tariffs
are expected to raise costs for businesses and consumers.
o Inflation, though easing, remained 3.5% year-on-year in June, well above the Federal Reserve's 2% target.
·
Energy
prices affect the broader economy:
Rising fuel costs increase expenses for:
o Transportation and logistics.
o Manufacturing.
o Agriculture (fertilizers).
o Air travel.
o Household heating.
·
Previous
improvements may reverse:
Before renewed hostilities:
o Retail gasoline prices had fallen 15%.
o Jet fuel prices had declined 35% from spring highs.
Economists had expected these declines to help lower overall inflation.
·
Goldman
Sachs assessment:
Sustained oil prices around $100
per barrel could
cause inflation to spread beyond energy and food into the broader economy.
·
Moody's
outlook:
Moody's expects oil prices to remain elevated throughout the year, making
inflation reduction slower and more volatile.
·
Impact
on low-income households:
o Rising heating oil prices could
significantly increase winter energy bills.
o The National Energy Assistance Directors
Association estimates average household heating costs could rise to about $1,700 this winter, compared with around $1,100 last winter if crude remains near $100
per barrel.
·
Federal
Reserve faces added challenges:
Policymakers must now balance:
o Persistent inflation.
o Higher energy prices.
o Trade-related price increases.
o Economic uncertainty from geopolitical
tensions.
o Structural changes associated with
artificial intelligence.
·
Economic
fundamentals remain relatively resilient:
o Oxford Economics projects 2.3% U.S. GDP growth this year.
o The labor market
continues to post steady job gains despite slower growth.
·
Tariff
impact on consumers:
o The Yale Budget Lab estimates the new
measures could raise the average U.S. tariff rate to 12.8%, up from 9.8% if the previous global tariff had simply
expired.
o Average U.S. households could incur
approximately $1,100
in additional annual costs
under the full package of recent tariff measures, compared with roughly $550 under prior policy assumptions.
·
Business
uncertainty persists:
Frequent tariff changes continue to complicate planning for importers,
manufacturers, and retailers despite earlier court rulings limiting the
administration's tariff authority.
The combination of
renewed Middle East conflict and expanding U.S. tariffs has revived concerns
that inflation could remain elevated for longer than expected. Higher energy
prices and increased import costs threaten household purchasing power,
complicate the Federal Reserve's monetary policy decisions, and pose political
challenges for the Trump administration ahead of the midterm elections. If oil
prices remain around $100
per barrel and
additional tariffs are implemented, inflationary pressures could intensify
further, slowing progress toward price stability and increasing costs for
businesses and consumers alike.
A
few short weeks ago, the U.S. economy seemed to be catching a summer break.
The
war with Iran appeared to be waning. Energy markets had started to calm. Prices
at the gas pump had fallen, and across the economy, inflation had begun to cool.
It
amounted to a welcome respite for American families and businesses, which had weathered
more than a year of shocks that began with President Trump’s global trade war.
But
the reprieve did not last.
A
widening military conflict with Iran entered a dangerous new phase this week, spooking
energy markets and sending global oil prices to $100 a barrel. The anxiety spilled
into gas prices, which topped $4.10 a gallon in much of the country, according to
AAA. And the tumult coincided with the return of Mr. Trump’s trade brinkmanship,
as the White House formalized a slate of new tariffs on dozens of countries on Friday.
The
duties apply to some of the largest U.S. trade partners, including the members of
the European Union, which the president has since threatened with an additional
round of trade penalties. Tariffs are taxes that apply to imported goods, so Mr.
Trump’s actions threatened to again raise costs for some American companies and
consumers.
The
forces, taken together, complicated the nation’s economic outlook in familiar ways.
Once, economists figured that an end to the hostilities in the Middle East would
spell a gradual return to normal. Instead, the renewed fighting cast those assumptions
into doubt, leaving the nation’s long, hard fight against inflation as vexing as
ever.
“The
longer the war is in place, at this current level of intensity, the worse it is
for consumers,” said Olu Sonola, the head of U.S. economics at Fitch Ratings.
The
economic headwinds loomed especially large over Mr. Trump, with less than four months
until the midterm elections. Yet at a rally in Marietta, Ga., on Wednesday, the
president seemed unfazed by the blowback from the war with Iran, a conflict he has
repeatedly downplayed.
Mr.
Trump declared that inflation was “way down,” pointing to falling prices in June,
before promising that energy costs in particular would “come down, maybe lower than
when we even started.”
“But
just give me a little time,” he added.
Mr.
Trump’s comments framed the stakes for the economy as well as for the Republican
Party, with voters growing impatient over the nation’s economic course. Many have
told pollsters that they are frustrated with Mr. Trump’s agenda and unhappy with
the state of the war.
From
the beginning, Mr. Trump has tried to shape the intervention as essential for national
security, arguing that he had to prevent Iran from obtaining a nuclear weapon. His
economic message has wavered in the process. At various points, he has dismissed
the costs of the conflict, mused that the fallout could be far worse and expressed
optimism that the United States could absorb any blow.
In
many ways, the economy has been resilient, and it could grow 2.3 percent this year,
analysts at Oxford Economics estimated this month. The labor
market also remains strong, posting slower but steady gains last month.
But
inflation remains a scourge that has dragged down Americans’ finances. Despite registering
the largest single-month drop in six years, consumer prices overall were still 3.5
percent higher in June than they were a year earlier. That was well above the 2
percent target set by the Federal Reserve.
The
White House celebrated the latest inflation data, which arrived precisely as the
United States and Iran resumed their hostilities — raising concerns that any improvement
could prove short-lived. The expected jump in oil and gas prices quickly followed,
as shipping traffic in the Strait of Hormuz again slowed to a crawl.
The
turmoil essentially arrested weeks of gradual improvements. Before the uptick in
hostilities, retail gas prices had fallen 15 percent and jet fuel had declined 35
percent, compared with highs seen in the spring, according to a report this month
from Goldman Sachs. Economists had predicted the drop was poised to push down consumer
prices broadly, given that energy affects everything from shipping to fertilizer.
But
Goldman Sachs also forecast that a major intensification in the war, one that pushed
oil to $100 a barrel, could exacerbate inflation even beyond volatile goods like
food and energy in the coming months.
“Volatility
and unpredictability is the new normal,” said Atsi Sheth, the chief credit officer for Moody’s Ratings. She
said the hostilities affirmed her projection that oil prices would remain high through
the year.
In
April, when the United States and Iran struck their initial cease-fire, Ms. Sheth
said, economists foresaw inflation slowly descending from its May high, but settling
around 3 percent. Now, she said, the resumption of the war raises a “risk of that
trending down not being smooth.”
The
consequences of a prolonged return to war could prove wide-ranging, particularly
for lower-income Americans, who devote a larger share of their monthly income to
energy costs.
If
the hostilities cause energy prices to soar for months, one result could be a surge
in home heating bills. On Thursday, the National Energy Assistance Directors Association
estimated that the average household with oil heat could see costs rise to $1,700
this winter if crude stayed at $100 a barrel.
That
is compared with roughly $1,100 last winter, according to the association, which
represents state directors for a federal program that helps low-income Americans
afford their heating bills. The group asked Congress to approve additional money
for the program
The
geopolitical discord added to the challenges facing the Federal Reserve, which is
set to gather next week. The uncertainty cast fresh doubt on whether policymakers
led by Kevin M. Warsh, the Fed’s new chairman, would opt to keep interest rates
unchanged in response to inflation.
Even
before the war, the Fed had its hands full with the novel issues posed by the rise
of artificial intelligence. Central bank officials had also been managing the shocks
from Mr. Trump’s global trade war, as his roster of ever-changing tariffs rippled
across the economy.
Those
tariffs evolved again this week. On Friday, the Trump administration finalized a
roster of new taxes on imports from much of the world, the biggest step in the president’s
attempt to recreate the tariff scheme that the Supreme Court struck down in February.
Starting
at midnight, many imports from more than 80 countries, including Canada, Mexico
and the European Union, are subject to taxes of 10 percent or 12.5 percent. The
duties, imposed under Section 301 of the Trade Act of 1974, are meant to address
unfair trade practices, particularly concerns that those countries have not cracked
down on “forced labor.”
Mr.
Trump plans to subject additional countries in Europe and Asia to similar duties
in the coming months for the overproduction of certain goods. Separately this week,
he announced a 50 percent tariff on many goods from Canada, including wine, hockey
sticks and paper, claiming that the country discriminated against U.S. industry.
And Mr. Trump issued a new threat to the European Union on Friday, saying he would
impose “a substantial TARIFF” against the bloc over the fines it has levied on U.S.
tech companies.
”The European Union will pay a very big price
for this illegal and highly unethical conduct, which I have consistently warned
them about,” Mr. Trump said on social media.
For
now, the president’s current tariffs could raise the average tariff rate on imports
to 12.8 percent by the end of the year, according to an early analysis by the Yale
Budget Lab, which studied the duties previously announced by the administration.
(Some of those rates have since changed.) That compared with 9.8 percent if the
administration did not act and let an existing 10 percent tariff around the world
expire.
For
consumers, the changes in tariffs could also translate to real losses. Households
could face an average of $1,100 in additional annual costs under the full slate
of Mr. Trump’s recent policies, compared with about $550 under current law, the
nonpartisan think tank found.
The
flurry of new tariff announcements recalled the frenetic early days of Mr. Trump’s
second term, when flip-flopping rates often roiled the global economy and complicated
matters for businesses.
The
courts later blocked the president from using a decades-old law to impose those
duties on a whim. That, said Mr. Sonola of Fitch, helped
to create a process that could be more predictable, though he noted that Mr. Trump
had not yet completed all of his planned duties.
“If
we end up being surprised with much higher tariff rates,” Mr. Sonola added, “that will pile on the misery.”