President Donald Trump continues to give mixed messages about the war in Iran. But what is clear is the impact that the conflict is already having on the United States and the world economy.
Oil prices, which briefly hit $100 a barrel on Monday, are higher than we’ve seen in years. People are already seeing results at the pump, and average gas price over $3.50 a gallon. But the effect doesn’t stop there: It too means that the price of, well, everything, can rise.
Mike BirdWall Street editor of The Economist, told Today, It’s Explained co-host Noel King that higher prices, if sustained, could spell trouble for Trump and the GOP in the upcoming midterm elections.
Below is part of Bird’s conversation with Today, It’s Explainededited for length and clarity. There’s more throughout the episode, so tune in Today, It’s Explained wherever you find podcasts, incl Apple Podcasts, Pandoraand Spotify.
Is the Iran war already affecting the US economy?
Yes, short answer. Oil prices move very quickly in response to future conditions and current conditions, and that is fed almost immediately to gas prices. If you own a car, if you’ve filled it up recently, you’ll have noticed it was more expensive than the last time.
People who spend money on gas have less money to spend on other things. That also feeds into all sorts of other things but the most visible short-term effect is on gas prices.
Why don’t we get into all sorts of other things while we’re here?
Energy is a good input. Most of the energy you use is not in the form of gasoline. It’s built into products in all kinds of things you buy, even things you wouldn’t consider consuming energy.
Agricultural products need fertilizers, they need tractors. Everything that is made, is made somewhere and uses a certain amount of energy. Feed-through from energy prices therefore affects every consumer product. Almost everything is affected by energy.
How long does it take? If I were to go to the grocery store today, would I find that eggs and vegetables are more expensive?
You probably wouldn’t get that right away, if only because most of the supply chain activity close to what you see in the store today would have begun before the attacks on Iran began.
These things last for a long time and vary. Some things will soon be valued in the store and other things may take months, maybe even more than a year.
“From an affordability perspective, this is now the second largest supply shock directly caused by the actions that the administration took.”
If you think about something like fertilizer costs, which are very closely tied to the price of oil, (they affect) the amount of food produced in different parts of the world. You won’t start seeing those low levels of food production for a long time and the price effects won’t be felt for a long time.
What about marketing? Markets, fair to say, are always kind of whipping, but (they) always bounce back, don’t they?
Markets tend to, over long periods of time, go backwards. It’s like you can see it for a long time. There aren’t many extended periods — say, 10 years — in the history of the U.S. stock market where you weren’t looking at good returns afterward. There are a couple, most of them long ago.
There has been a lot going on in the markets already this year. It has generally been down the last few days because of all this volatility.
The bigger question is, is this a thing that will end by the end of the week and there will be a withdrawal of shame and a retreat? Or is it something we will talk about in six months?
Now we have to talk about President Trump. What are we hearing him say about his war with Iran and his austerity agenda?
There has been a flurry of communication from the White House over the past few days when it comes to oil prices. The president has asked investors and the American public to look at what he calls short-term effects.
One thing we saw with last year’s taxes is that there’s an idea that the market is a discipline factor for the president — that basically, he doesn’t like to see the red line come down, that there’s only so much negative press he’s willing to tolerate.
Last year, it allowed tax cuts. The tax did not pass. It is clear that taxes (exist) are still largely imposed in various ways. So what that means for something as complex as this, because it’s a military effort, is very unclear.
Let’s say we want to imagine a world where we can return the price of oil to where it was three weeks ago. What should happen?
The big question in terms of how quickly things bounce back is how long this has been going on in the first place. The longer it goes on, the harder it is to get this production back.
You can’t just turn it on and off overnight. You don’t have all the required staff ready to go. If it drags on for weeks and months, I think it’s not a linear process. It can get worse and worse depending on how long it stays.
How do we see the president’s critics holding up his refusal to admit that he has not given an end at this time?
From an affordability perspective, this is now the second largest supply shock directly caused by the actions the administration took.
For the president’s opponents and critics, the most important thing to start thinking about is how this affects the midterm elections. If you see people paying more for gas, with prices going up across the economy like they have for the last few years, that’s going to be very bad for Republicans in the election.
