One thing is certain after the United States and Iran agreed to a framework deal to end the monthslong war and reopen the Strait of Hormuz: The cost-of-living crisis just got a bit less bad.
But how much less, and how long it lasts, are still open questions, particularly given the deal’s unknowns.
“How many times have we talked about a ceasefire? We have been here before and we’ve seen the same reactions time and time again,” said John Mousseau, chief investment officer for Cumberland Advisors, a subsidiary of Mid-Penn Bancorp. “If the war actually ends, then the follow-through should be lower oil prices, declining bond yields, and declining inflation – but that’s going to take time.”
Still, for American consumers stretched thin, any little bit helps.
How Much Will the Price of Gas Fall?
On June 15, the nationwide average gas price dropped below $4 a gallon – albeit only to $3.99 – for the first time since mid-April, according to metrics compiled by GasBuddy. Brent crude oil, the global standard, was trading at about $82.61 a barrel, its lowest since early March.
“For now, the national average could continue falling, provided there isn’t a drastic reversal and the U.S. and Iran continue moving in a positive direction,” said Patrick De Haan, head of petroleum analysis at GasBuddy.
Still, until the strait is reopened and oil flows begin to move as normal, he cautioned, there’s little reason to believe that this price relief will last.
In a research note published early June 15, analysts at Oxford Economics agreed, writing that “the agreement between the U.S. and Iran is a significant step towards reaching a full-blown deal. But there will likely be bumps in the road, and it will still take time for shipping in the Strait of Hormuz to approach pre-war levels.”
Is an Iran Peace Deal Good for the U.S. Economy?
The money freed up from declining costs at the pump should help support the entire economy.
In March, Oxford wrote that “Every $0.10 on gasoline prices adds around $12.3 billion in spending on gasoline, or around 0.06% of consumer spending that isn’t available to be spent on other goods and services.”
Beyond the price of specific things households need, an end to the hostilities will likely also mean that broad measures of inflation will come down.
The consumer price index, tallied by the Labor Department, has surged since the start of the war. Before the conflict began, the annual inflation rate held steady at 2.4% in February. It jumped to 3.3% in March and rose again to 3.8% in April, driven by supply chain disruptions and soaring fuel prices that increased the cost of producing other goods.
It will take global supply chains “a couple of quarters” to get back to normal, said Ben Shoesmith, a senior economist with KPMG Economics, in a note published June 15. That will keep price pressures higher “for some time.”
What Does the End of the War Mean for the Fed?
Measures of inflation matter because the Federal Reserve keeps an eye on overall price changes when deciding on interest rate policy. The détente announced this week may help make the case for policymakers to hold rates steady, many economists think. The Fed will announce its next rate decision on June 17.
“There’s still a possibility that this inflation scare proves transitory,” said Don Rissmiller, chief economist for Strategas. “At a minimum, the latest oil price declines should buy some time for central bankers to find out.”
But the Fed isn’t the only market force that decides the path of interest rates.
Investors in U.S. Treasury bonds also hold a lot of cards. Since the start of the war, those investors have made it clear that they expect higher inflation, which erodes the value of the income that bonds offer. When investors sell bonds, their yields (rates) rise. Seen from the other side of the deal, that means that bond issuers must pay higher yields, or rates, for investors to be enticed to buy.
So far, bond investors haven’t reacted to the peace deal announcement as much as those in the oil market. The 10-year Treasury yield surged as high as 4.671% in early May and has moved downward, choppily, since then. It is roughly flat since the deal was announced over the weekend, however.
“The bond market needs more convincing that inflation isn’t going to be embedded in the economy,” Mousseau told USA TODAY.
Those higher yields on government bonds have several implications. Among them: Mortgage rates stay high, alongside the U.S. 10-year note they tend to track. But more simply, when the government has to pay more to finance its operations, particularly when it’s spending more on the war and taking in less because of tax cuts, there’s less room for other items in the budget, like health care and Social Security.
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