Economists have clearly downgraded their outlook for the U.S. economy, concluding that the war with Iran and rising energy prices will weigh increasingly heavily on economic activity in the coming months. At the center of these concerns are higher inflation, weaker consumption, slower GDP growth, and a deteriorating labor market. More and more often, the conflict in the Middle East is being viewed not as a temporary disruption, but as a new inflationary shock that could make it harder to maintain a balance between growth and price stability.
Inflation is once again becoming a bigger problem
According to a Bloomberg survey, the average forecast for growth in the PCE index—one of the most important measures of inflation in the U.S.—has risen for this year to 3.1% from the previous 2.6%. This is a significant shift, showing that economists are beginning to assume a more lasting impact of higher energy prices on prices across the entire economy. An additional warning signal comes from the OECD, which expects average inflation in G20 countries to reach 4% this year, whereas as recently as December it had projected 2.8%.
At present, the conflict is having its strongest impact through the fuel and energy markets. Gasoline prices in the U.S. have risen by more than 30% this month, to around $4 per gallon, marking the biggest jump since Hurricane Katrina in 2005. Higher fuel and transportation costs are already increasing the burden on households, and in the coming months they may also translate into higher food prices and prices for other consumer goods. There are also concerns about fertilizer shortages, which could push prices in stores even higher.
Economic growth is weakening, and the labor market is sending worse signals
The worsening outlook is also visible in economic growth forecasts. Economists now expect U.S. GDP to grow by 2.3% this year, compared with the earlier forecast of 2.5%. The scale of the revision does not yet suggest a sharp downturn, but it does confirm that the economy is beginning to feel the effects of rising energy costs and greater uncertainty more clearly.
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