Iran War Lifts Fuel Costs, Strains U.S. Economy Before Midterms

Four months into the war in Iran, rising oil costs and higher inflation are straining household budgets and affecting markets. U.S. regular gasoline averaged $4.52 a gallon on Monday, up from $3.14 a year earlier. Consumer prices rose 0.9% in April, bringing the annual inflation rate to 3.3%, the highest since April 2024.

Goldman Sachs chief economist Jan Hatzius wrote that the global economy is “bending, not breaking.” He attributed the stock market’s resilience to three factors: pre-war oil stockpiles, airlines trimming routes that eased jet fuel shortages, and heavy corporate investment in artificial intelligence. Hatzius lowered the bank’s annual recession probability to 25% from 30% but noted the estimate remains about five percentage points above the level before the conflict.

Major stock indexes remain near record highs, supported by technology valuations tied to AI spending, even as other sectors pause hiring and investment. Economists expect consumer spending to slow once tax refund flows taper and warn inflationary pressure may persist if the conflict pushes up energy costs and limits wage growth.

April’s jobs report showed 115,000 jobs added and an unemployment rate of 4.3%. RSM chief economist Joe Brusuelas described the labor market as “low-hire, low-fire.” Guy Berger, chief economist at Homebase, called the report “a signal of what could have been” and expressed concern about the outlook. Kathryn Anne Edwards, co-founder of Optimist Economy, warned the labor market could not absorb a new wave of losses, adding “this would look like a bad recession.”

Part of the reason the unemployment rate has not risen is a smaller labor force. Administration immigration and deportation policies have reduced the available worker pool by roughly 600,000 people, according to analysts. Manufacturers and business leaders have largely paused hiring and investment while they await clarity on the conflict’s path.

Political implications are mounting. A May 1–4 poll found 38% of registered voters approve of President Trump’s handling of the economy, while 69% disapprove of his response to rising prices. Democrats need to flip eight of 18 competitive House districts to take control. To address economic concerns, the president proposed temporarily suspending the federal gas tax and easing restrictions on beef imports.

On Monday, the president said a ceasefire with Iran was “on massive life support.” That comment coincided with higher oil prices and lower U.S. stock indexes. Market strategists and economists say the direct costs of the war and its effects on inflation and spending will be key variables for the outlook.

Analysts note that strategic oil stockpiles, airline fuel rationing and AI-driven corporate spending have so far limited severe price spikes. They added that sustained higher fuel costs, slowing consumer demand and weaker wage growth could change current market conditions.