Fears for US economy as battle in Middle East threatens oil prices and shipping through Suez Canal and Strait of Hormuz – as experts warn could cause MORE inflation
- Analysts warn that the Israel-Hamas war could cause turmoil in the world economy
- The conflict could affect oil prices, world trade, inflation and confidence in the markets
- Economists say it is too soon to say what the effect will be, but they are keeping a close eye on developments
America’s economy could be rocked by the war between Israel and Hamas, analysts said – warning that the dollar could be affected and oil prices could be hit quickly.
The conflict could lead to higher inflation in the United States, which would be a major problem for President Joe Biden heading into the election year.
Economists at Goldman Sachs reported on Tuesday that the consumer price index is expected to continue its downward trajectory, falling to 3.98 percent in September from 4.3 percent in August.
The news will be welcomed by the White House, but their work to reduce inflation could be undone by the rapidly developing events in the Middle East.
The turmoil could affect the Suez Canal – the fastest shipping route between Europe and Asia, which carries seven percent of all world trade and is responsible for the passage of $10 billion worth of goods every day.
Smoke billows after a strike by Israel on the port of Gaza City on Tuesday. Economists are watching the conflict closely to see how it affects global trade and commodities
A trader is seen at work on the floor of the New York Stock Exchange. The war causes great uncertainty in the markets
Amphibious dock landing ship USS Carter Hall is seen in August moving through the Suez Canal – a vital route connecting Europe and Asia
It could also affect the Strait of Hormuz, widely regarded as the world’s most strategically important passage for international trade. Twenty percent of global oil supplies flow through the Strait, which connects the Persian Gulf with the Gulf of Oman and the Arabian Sea.
“The conflict poses a risk of higher oil prices, and risks to both inflation and the growth outlook,” said Karim Basta, chief economist at Ill Capital Management, according to Fox Business.
Another analyst, Carl Tannenbaum, chief economist of Northern Trust, said the uncertainty caused by the conflict could cause swings in oil prices.
“Any source of economic uncertainty slows down decision-making, increases the risk premium, and especially given that region … there’s a fear about where oil is going to open up,” he said.
Tannenbaum added that markets will follow “what the scenarios look like” and whether, after decades of instability in the Middle East, this outbreak of violence plays out differently.
‘The question will be: is this iteration something that will throw the long-term equilibrium out of balance?’
Twenty percent of global oil supplies flow through the Strait of Hormuz, which connects the Persian Gulf with the Gulf of Oman and the Arabian Sea.
The Suez Canal is pictured in 1973, as Egyptian soldiers transport supplies. The canal is of crucial strategic importance and now carries seven percent of all world trade
Agustin Carstens, general manager of the Bank of International Settlements, warned that it was too early to say how the conflict would affect the economy.
Carstens told the National Association for Business Economics that it was “too early to tell” what the economic implications of a Middle East conflict could be, although oil and stock markets could see immediate fallout.
Federal Reserve officials have been monitoring a recent rise in U.S. Treasury bond yields for signs that investors may have shifted financial conditions beyond what is needed to cool inflation and raise the risk of cooling the economy too dramatically — which could the Fed’s desired ‘soft landing’ for this inflationary cycle.
US Treasuries are generally considered a safe haven in times of economic uncertainty and crises, so the conflict could prompt a flight by investors in search of relative safety.
Bond prices and interest rates are inversely correlated, so greater demand for Treasurys will help lower interest rates.
While falling interest rates can act as a warning sign of a rise in inflation by encouraging consumers and businesses to borrow and spend more, the context of a new regional war in the Middle East could cause markets in this case to ‘ draw a different conclusion.