As I keep emphasizing, the War in Iran has the potential to ignite another round of inflation in the U.S. In fact, the longer this conflict drags on, the higher the odds of inflation surging.
When most people think about oil and its uses, they think of gasoline and cars. But the reality is that oil prices input to just about everything in the economy. In this contex, higher oil prices can cripple an economy in a step by step fashion.
The first sector to get hit is transportation. Higher oil prices means that every shipping truck, every cargo ship, every airline faces sharply higher operating costs. This is why the Dow Transportation Index collapsed over 10% as soon as the conflict with Iran began.
Manufacturing is the next sector to next hit. Oil and other petrochemicals are embedded in plastics, fertilizers, pharmaceuticals, and industrial lubricants. When crude rises, input costs climb across entire industries in lockstep. Take a look at tool manufacturer Stanley Black and Decker (SWK) and you’ll see what I mean, SWK shares are down over 20% since the conflict began.
Eventually, if oil prices remain elevated for long enough, inflation will spread into the broader economy. As I’ve already outlined, energy prices are the only component of the CPI that is actually declining. Remove that and the disinflationary impulse that has pushed equities higher since late 2023 is gone.
Stocks are beginning to discount this.
Bottomline: the War in Iran has the potential to unleash another inflationary storm. The longer this conflict lasts, the greater the odds.