US-Iran war: Gas prices over $4 as UBS warns ‘economic gravity’ will catch consumers

Donovan is referring to the famous Road Runner cartoon in which Wile E. Coyote runs off a cliff-edge without realizing, hangs motionless in the air in a moment of disbelief, before crashing down to earth.

It will be painful for U.S. households—already stretched after sticky inflation for the past few years—to suffer the same fate. Even over the past few weeks, the reignition of conflict in the Middle East has begun to stretch their wallets once again.

According to data from the American Automobile Association (AAA), gas prices have once again hit $4 this morning, from just shy of the benchmark yesterday. Only a week ago, the price of a regular gallon of gas was $3.87, and a month ago it was $3.14.

The price of a barrel of Brent Crude was $88 this morning, down slightly from an overnight high of $91.

Consumers are paying for the re-escalation in the Middle East because Iran borders the Strait of Hormuz, a vital waterway for oil exports from the Persian Gulf to the rest of the world. With ships reluctant to travel down the Strait—despite Trump insisting it is controlled by the U.S.—supply is stalling while demand remains at the same level, pushing prices up.

Markets don’t seem convinced that relief is around the corner. Per CME Group data, crude oil futures have increased by approximately 1.5% over the next three months to more than $80 a barrel. Looking ahead, prices aren’t expected to drop back to $70 a barrel until December 2027.

Escalation vs inflation

With a key metric in inflation data—gas and fuel prices—pushing in the wrong direction once again, this sets up a new balance of risks.

Goldman Sachs’s chief U.S. economist, Jan Hatzius, wrote in a note last night that he sees two possible paths unfolding: “The swift recovery in flows prior to the most recent escalation shows that Gulf exports can rebound quickly when given a chance, which means that prices could fall sharply if the latest escalation subsides. But more attacks on tankers and Middle East infrastructure could push prices back to the $100+ range that prevailed for much of the hot phase of the conflict.”

Goldman’s expectation for year-on-year core personal consumption expenditure inflation is that it will slow to near the Fed’s target of 2% in 2027, driven by reduced contributions from software and accessories, and the lower costs of energy and tariffs being passed through to consumers.

However, Hatzius writes: “To keep control of the narrative and prevent financial conditions from overshooting, we think Chairman [Kevin] Warsh will have little choice but to explain the committee’s economic outlook and reaction function in much greater detail than in his first press conference and congressional testimony.”