Israel–Iran war may send prices soaring, fuel global economic turmoil

As tensions between Israel and Iran escalate into direct military confrontation, shockwaves are rippling through global markets, threatening to unleash a fresh wave of inflation and derail fragile economic recoveries.

Gold prices soared, oil surged, and investors fled to the safety of the US dollar on Friday after Israel launched strikes on Iranian military assets. The economic tremors are already visible, with energy markets, shipping, consumer goods, and travel sectors bracing for renewed volatility.

Oil spikes, gas prices may follow

Crude prices posted their largest one-day surge since Russia’s invasion of Ukraine in 2022. Brent crude jumped over 9 per cent, crossing $94 per barrel, while WTI crude hovered above $91, as per Reuters.

The market is now pricing in a worst-case scenario—an Iranian attempt to blockade the Strait of Hormuz, which handles about 20 million barrels per day, or roughly 20 per cent of global oil flows, according to the US Energy Information Administration (EIA).

As quoted by ING and Bloomberg, the Israel–Iran conflict could wipe out a projected Q3–Q4 2025 oil surplus, pushing prices further up. JPMorgan analysts, quoted by Reuters, warned crude could surge to $120–130 per barrel if supplies from the Gulf are disrupted.

In the US, average gas prices were $3.13 per gallon on Friday, down from $3.46 a year ago, according to AAA. But that decline could reverse quickly. In India, fuel prices are closely tied to Brent benchmarks, and as per Nomura, a sustained surge could result in a ₹4–5/litre hike in petrol and diesel prices.

Shipping squeezed again: Red Sea risk rises

The Red Sea which is already under stress from Houthi rebel attacks will now faces heightened risk amid Iran-backed militant threats to commercial vessels. Shipping traffic in the region has fallen by nearly 25 per cent since January, according to Lloyd’s List Intelligence, as carriers avoid the high-risk corridor.

US-led airstrikes in Yemen have forced global cargo carriers to reroute vessels around the Cape of Good Hope, adding 10–14 days to Asia–Europe voyages and sharply increasing insurance and fuel costs, as reported by Bloomberg.

The Baltic Dry Index, a global benchmark for shipping activity, rose to 1,904, it's highest in eight months—as per Trading Economics. Shipping stocks also surged: Teekay Corp and Frontline Ltd gained 6–7 per cent, according to Bloomberg data.

Consumer goods: A perfect storm of tariffs and tensions

With US President Donald Trump’s 2025 tariffs imposing new levies on imports from China, Vietnam, and India, retailers are already under pressure. The US Retail Federation, as quoted by Reuters, estimates that these tariffs are adding 5–12 per cent to wholesale costs across product categories.

The Israel–Iran conflict is expected to amplify these pressures. Logistics and energy costs are rising, and companies like Walmart and J.M. Smucker have already passed those hikes onto consumers, as noted by Reuters.

As per ING analysts quoted by the Associated Press, firms are burning through their inventory buffers, and the resulting supply crunch could cause “larger month-on-month inflation spikes” in mid-2025. Central banks that were celebrating a soft landing may now be forced into a new inflationbattle.

Travel turmoil: Flights down, costs uncertain

Jet fuel prices are climbing fast, and airlines are adjusting. As per FlightRadar24, over 100 commercial flights have been cancelled or rerouted since the start of the week, with airspace over Iran, Iraq, and parts of the Gulf becoming increasingly restricted.

Major airlines including Lufthansa, Emirates, and Air India have announced temporary flight suspensions or altered long-haul routes to avoid the region, according to Reuters. These detours raise fuel burn and operating costs significantly.

The S&P 500 Airline Index dropped 1.6 per cent on Friday, with shares of Delta Air Lines and United Airlines falling 2–3 per cent, as reported by Bloomberg. Analysts expect operational costs to rise further as hedging becomes more expensive.

Despite that, leisure demand is softening. Bank of America card data, cited by Reuters, shows a 4.2 per cent dip in consumer travel spending over the past month. Combined with the Boeing aircraft safety concerns and rising geopolitical anxiety, passenger confidence remains fragile.

Federal Reserve under pressure

The economic fallout from a deeper Israel–Iran war could derail the global effort to tame inflation. The US Federal Reserve, which meets next week, was expected to hold rates steady, but may now revise its inflation outlook.

As quoted by the Associated Press, ING said price hikes “already in the pipeline” could be accelerated by conflict-driven supply shocks. The Fed’s Beige Book, released last week, flagged “widespread reports” of upcoming consumer price increases—particularly in sectors exposed to energy and logisticsvolatility.

The big picture: Geo-shock meets fragile recovery

The Israel–Iran conflict comes at a precarious time. With global inflation only recently stabilising, another commodity and supply chain shock could push households and businesses into a new wave of economic pain.

For now, diplomacy appears stalled. Until de-escalation materialises, global markets and policymakers face another long, uncertain summer marked by higher prices, tighter credit, and deeper strategic risk.

(With inputs from the agencies)