The main way that geopolitics affects consumers and businesses is via the energy market. For instance, gasoline and diesel are key inputs for transportation, manufacturing, and everyday consumer spending, so price swings can ripple through the broader economy.
Here are some factors to consider:
- The national average for regular unleaded gasoline has climbed above $4 per gallon, driven by conflict in Iran and disruptions to the Strait of Hormuz. While this is still below the $5 per gallon seen during the war in Ukraine, it is a jump of over $1 in just about a month. With the recent ceasefire and a drop in oil prices, consumers could begin to see relief at the pump, although this will depend on geopolitical events and may take some time.
- There are direct costs to consumers at the pump as well as indirect ones. Higher fuel costs raise prices across the economy since gasoline and diesel are inputs into transportation, manufacturing, and agriculture. That said, most households can absorb these higher costs without creating too much financial stress, although they do reduce discretionary income and savings. Those households at lower income brackets are hit the hardest.
- The jump in fuel prices, even if it ends up lasting only a couple of months, is expected to push headline inflation higher. Energy is an important component of overall inflation, one that consumers can't easily avoid. Organizations like the OECD have estimated that U.S. inflation could rise faster than expected in 2026. The IMF's latest projections show higher prices as well, stating that "'all roads' lead to higher prices, slower growth."
- Rising inflation complicates Federal Reserve decision-making. There was a brief period where the market assigned a greater probability of the Fed hiking rates. At the moment, fed funds futures suggest the Fed could hold rates steady. These swings in expectations due to geopolitics only add to economic uncertainty and make it difficult for businesses to plan beyond the next few months.
- Beyond the war in Iran, the economy has struggled for other reasons, including the weakening labor market. That said, there are positive factors as well. Consumer spending remains healthy and businesses continue to report expanding profits. This has helped to support both stocks and bonds despite geopolitical risks.
Inflation has been improving over the past few years, but has struggled to fall further in recent months due to both underlying economic trends and higher oil prices.
While short-term energy price spikes can create real challenges, long-term investors are best served by staying focused on broader economic trends and maintaining a well-diversified portfolio rather than reacting to individual market disruptions.