Iran War Could Push A Flagging US Economy Over The Edge

(MENAFN- Asia Times) The“fog of war” refers to confusion and uncertainty on the battlefield and the attendant possibility of fatal error. This principle has a parallel when it comes to the economic consequences of wars as well, especially when they occur in a region that is a chokepoint for the production and shipment of one-fifth of the world’s oil and a third of its natural gas.

Although no one really knows how deeply the ripple effects of the joint US-Israeli strikes on Iran will impair the global economy, the Gulf kingdom of Qatar issued a dire warning on March 6, 2026, that reflects those concerns:“This will bring down the economies of the world,” Qatar’s energy minister said.

The impact includes one of the largest oil price shocks in history, which briefly pushed the price of crude to nearly US$120 a barrel on March 8. As for the US economy, it was already showing signs of weakness. Data released on March 6 showed an unexpected loss in jobs in February.

As an economist, I expect the biggest economic risks of this war to be inflationary pressures and slowing growth due to the rising price of oil. In addition, uncertainty from the“economic fog of war” could make consumers reticent to spend and businesses hesitant about hiring and investing.

These conditions will make it challenging for policymakers to steer the economy.

Uncertainty and risks

There is currently, and likely to be for some time, great uncertainty about the length of the war in Iran, the range of countries involved and its costs. All of these factors will determine how much the war hurts economies in the US and across the globe.

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We do know there will be disruptions to the supply of oil and liquefied natural gas, which is difficult to ship through the Strait of Hormuz, and from the fiscal costs associated with this military action.

As of March 9, the price of crude oil was hovering a little under $90 a barrel after reaching $118 a day earlier. That’s up from $67 before the US and Israel began bombing Iran on Feb. 28, driving up gasoline prices across the US.

The majority of oil and liquefied natural gas produced in the Middle East travels through the Strait of Hormuz – but the threat of attack has made travel through this waterway uninsurable, which has brought shipping through this vital passage to a virtual halt.

This is also an expensive military campaign for the United States, which has already seen the loss of aircraft and a depletion of its stock of missiles. Early estimates of the cost of the war were nearly $1 billion a day.

Managing a supply shock

The 1979 Iranian Revolution also brought about a spike in the price of oil, which was an important contributing factor to the US and Europe experiencing an economic phenomenon called“stagflation” – a portmanteau of stagnant growth and high inflation.

This is unlikely to be repeated to the same extent now. Economies are less dependent upon oil and natural gas than they were in the late 1970s and early '80s. And the US is not beginning the war with a previous decade of high inflation that made it more difficult to reduce price pressures, since expectations of inflation feed into actual inflation.

Still, supply shocks are challenging to address, as the world saw with the Covid-19 pandemic, and policymakers will likely have to make some difficult choices that involve hard trade-offs.

Trade-off between fighting inflation or recession

One of the questions arising from supply shocks is whether a central bank should raise interest rates to combat inflation or lower them to offset weakness in the economy and rising unemployment. Lifting rates brings down inflation by reducing demand for loans and curbing growth, while lowering rates has the opposite effect.

In both the late 1970s and during the onset of the pandemic, the Federal Reserve opted to keep rates low to help support the economy and the job market. In both cases, this led to a spike in inflation.

The inflation of the late 1970s and early '80s was brought down by a strong reversal of monetary policy with high interest rates, causing a recession that was, at that time, the deepest since the 1930s.

Notably, the reduction of inflation in the wake of Covid-19 did not require a similar economic downturn to achieve that goal. An important reason for that is the long history of low inflation in the decades before the 2020s and the“anchoring” of inflation expectations.

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Risks on the horizon

But there are reasons to be concerned. While the Fed now has a well-deserved anti-inflation reputation, its credibility with financial markets is at risk because of President Donald Trump’s attacks on Chairman Jerome Powell, the prosecution of Federal Reserve Board member Lisa Cook and the appointment of a new chair who many suspect will push for lower rates because that’s what the president wants.

Concerns that these actions could lead to higher inflation can become a self-fullfilling prophecy that brings about the very thing that people are worried about. Seeds of new inflation pressures may be falling on fertile soil.

Uncertainty triggered by the war is not the only negative economic signal. Tariff policy, cuts to government employment, rising federal debt and the possibility of financial vulnerabilities are all weighing on the US economy.

A spike in the price of oil could very well set off greater weakness, and even a recession, as consumers and businesses pull back from spending.

This article was updated on March 9 with the price of oil.

Michael Klein is professor of international economic affairs at The Fletcher School, Tufts University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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