War With Iran Will Raise People’s Cost of Living

The conflict between the United States, Israel, and Iran is not just a geopolitical event. It is also an economic phenomenon that has the potential to impact people’s daily life. Even for people who are thousands of miles away from the Middle East conflict zone, the impact of the conflict will still be felt on their budget.

Wars in the Middle East are usually characterized by increases in the prices of various commodities. Economists say that the conflict has the potential to cause inflation in the global economy.

Below are the top three ways the conflict with Iran will impact the budget of people all over the world.

1. Energy Prices Are Rising—And That Affects Everything

The most immediate effect of the war on the economy is the increase in the price of oil. The country of Iran is located near one of the most important shipping lanes in the world for the transport of oil and gas. In fact, 20% of the global flow of oil passes through this narrow waterway.

As the war escalated, the price of oil rose above $100 per barrel.

When the price of oil increases, people immediately feel the effects of the war at the gas pump. Gasoline prices rose from $3 to $3.48 to $3.60 per gallon within days of the war’s escalation in the U.S.

However, the effects of the war are not felt only at the gas pump. Energy is one of the most important inputs to the economy:

• Transportation companies spend more on fuel
• Airlines increase their ticket prices
• Factories have higher operating costs
• The cost of electricity and heating also goes up

As these businesses try to cope with these increased costs, they tend to increase the cost of goods for consumers.

According to economists, every 10 percent increase in oil prices contributes up to 0.4 percent to overall inflation.

This means that when war causes energy prices to go up, other product prices also go up.

Higher Transportation and Production Costs Raise Food and Goods Prices

Energy prices not only impact fuel prices; they also impact the price of almost everything else that we purchase.

The modern logistics chain heavily depends on a transportation infrastructure that is fueled by oil. Ships, trucks, trains, and airplanes all require fuel to carry goods from the factory to the store. When oil prices increase, the cost of transporting goods goes up exponentially.

This has a particularly significant impact on food prices. Farmers need fuel for tractors, irrigation systems, and transportation to get their goods from the farm to the market. Fertilizer production is also heavily dependent on oil prices. When oil prices increase, farming becomes more expensive.

Analysts have said that disruptions from the war have already impacted oil, gas, and fertilizer prices.

The end result is a domino effect on the entire economy:

• Energy prices rise
• Transportation costs rise
• Manufacturing costs rise
• Retail prices rise

Consumers may experience these changes a few weeks or months after the original shock. Studies indicate that consumers spend less two to three months after a large oil price surge. This is because consumers must adapt to the new prices.

This may mean that consumers must spend more on basic items like groceries, electricity, and transportation.

Inflation and Interest Rates Could Stay Higher for Longer

A prolonged war with Iran could also impact monetary policies and interest rates, which directly impact mortgages, credit cards, and loans.

Before the start of the war, many central banks, like the Federal Reserve in the United States and the Bank of England, were expected to lower their interest rates to boost economic growth. However, with increasing oil prices, inflation is rising again.

If inflation goes up, these central banks may not lower their interest rates or may even raise them to control inflation.

If interest rates go up, it will impact households in several ways:

• Increased mortgage repayments
• Increased interest on credit cards
• Increased interest on car loans and personal loans
• Investment will decrease, leading to lower job creation

Economists are warning that a prolonged impact of increased oil prices could even lead to a phenomenon called stagflation, where inflation remains high, and economic growth slows down.

In such a situation, it will become difficult for people to keep up with increasing prices and growing wages.

Financial markets are already feeling the impact of these factors, and stock markets are becoming more volatile, with governments trying to calm the oil markets and protect households from increasing prices.

Why This Conflict Matters for Household Budgets

Although wars may seem far removed from our daily lives, wars in major energy-producing nations have global economic repercussions. The Middle East is a major player in the world’s energy production, and any problems in that region will soon be felt around the world.

If the war continues or spreads, oil prices may rise even further, possibly as high as $145 to $185 a barrel.

This will, in turn, drive inflation levels up, making life more expensive for people in many nations.

For individuals, the most felt effects will probably be in these three areas:

• Fuel and energy expenses will rise
• Food and other product prices will rise
• Borrowing will become more expensive as interest rates rise

The Bottom Line

The war with Iran is not only a geopolitical problem but also an economic issue that could have an impact on people’s lives all over the world. This is due to increased energy problems, transport costs, and inflation concerns that all add up to increased living costs.

The war’s effects may be felt even by people far removed from it when they go to the gas station, grocery store, or bank.

The increase in the cost of living depends on just one thing: how long this war is going to last.

By William Hernandez

Journalist for Vlixx Magazine, reporting on news from around the world, ensuring timely, accurate, and detailed information to keep the public informed and educated.

Sources:

CNN: 3 things you need to understand about how war with Iran will raise your cost of living

Economist: An attack on the world economy

Featured Image Courtesy of Morning Calm Weekly Newspaper Installation Management Command, U.S. Army Flickr Page – Creative Commons License

Inset Image Courtesy of Dave Amos Flickr Page – Creative Commons License