The US and Iran have agreed to a framework deal that targets to end the long war and reopen the Strait of Hormuz. This development has slightly eased worries about the rising cost of living for people in the US. However, experts say it is still unclear how big the impact will be or how long any relief will last.
Analysts warn that similar ceasefire hopes have happened before, but results were not always stable or long-lasting. If the war truly ends, it could lead to lower oil prices, lower bond yields, and slower inflation, but this will not happen immediately, as reported by USA Today. Even with all the uncertainty, small improvements in prices and inflation can still help households that are already under financial pressure.
1. Gas prices may come down
The US and Iran have agreed to end the long war and reopen the Strait of Hormuz, which is a major oil shipping route. Because worries about oil supply are reducing, global oil prices have started to come down. Brent crude has fallen to about $82 per barrel, which is its lowest level since early March, according to a GasBuddy report. In the US, the average gas price briefly fell to about $3.99 per gallon, the lowest since mid-April.
Expert Patrick De Haan, GasBuddy said in the report by USA Today that the gas prices could keep falling if tensions stay low and oil supply keeps flowing smoothly. However, prices may rise again if the deal slows down or shipping through the Strait of Hormuz is interrupted again, as per the warning by analysts at Oxford Economics.
Also read: Dow Jones hits record high as Trump announces US-Iran peace deal: Here’s how the market reacted
2. Inflation could slow down across the economy
Lower oil and fuel prices can reduce transport and production costs, which helps bring down prices of everyday goods, as per the Oxford Economics. Even small changes matter, such as every $0.10 drop in gas prices can free up about $12.3 billion in US consumer spending power.
Before the war, US inflation was around 2.4%, but it rose to 3.3% in March and 3.8% in April as fuel prices and supply costs increased, as per the US Labor Department, as cited by USA Today. It will take a few months for global supply chains to get back to normal, even after the war ends. Because of this delay, price pressure may stay higher for some time even after the peace deal.
3. Impact on interest rates and the US economy
Lower inflation could give the US Federal Reserve more confidence to pause interest rate hikes at its next meeting, which is on June 17. Some economists say the recent oil price drop may be “transitory” relief, meaning inflation could calm down at least temporarily, as reported by USA Today. Bond investors are still not fully convinced that inflation is under control, so they remain cautious even after the peace deal news.
US Treasury yields rose earlier due to inflation fears, which made borrowing more expensive for the government and kept mortgage rates high. If inflation stays low for a longer time, borrowing costs may go down. But if it doesn’t, high interest rates and tight budgets could continue to limit government spending.
