US-Iran Peace Agreement Eases Inflation Worries, Economists: Worst Energy Impact May Be Over, but American Consumers Still Face Challenges

As the United States and Iran approach a peace agreement, the market is beginning to bet that the energy price shocks of the past few months are gradually easing. Many economists believe that the peak inflation caused by the war may have already occurred, but there is still considerable uncertainty for American consumers and the overall economic outlook. After US President Trump announced that both sides were about to sign a memorandum of understanding, international oil prices fell sharply, and US stocks rose simultaneously. The market widely considers this as an important signal of easing tensions in the Middle East. However, analysts warn that even if the agreement is ultimately reached, it will take time for the Strait of Hormuz to resume normal trade transportation, the global energy supply chain to stabilize, and for American consumers to truly feel the price drop. Andrew Hollenhorst, Chief US Economist at Citigroup (C.US), stated that the energy market has experienced significant volatility in recent months, making it not easy to predict oil price trends accurately, but the overall direction has become clearer. "If there is any lesson to be learned from the past few months, it is that the energy market and the oil market are very difficult to predict. But at least in terms of direction, I believe everyone agrees that the future trend is downward." Data shows that US CPI rose by 4.2% year-on-year in May, reaching the highest level in over three years, and for the first time in recent years, exceeding 4%. Energy price increases were the main factor driving the rise in inflation. Statistics show that over half of the rise in consumer prices in May came from the increase in energy costs. With recent international oil price decreases, US gasoline prices have gradually fallen from their peak at the end of May, and economists generally expect overall inflation to decrease in the coming months. Economist Anna Wong pointed out that the second round of inflation caused by the war is also gradually weakening. She stated that several industries previously affected by oil price shocks, including aviation fuel, fertilizers, plastics, polymers, natural gas, and aluminum, among others, have mostly peaked and started to fall. "Except for steel, most energy-related commodity inflation has begun to decline." Although the agreement has not yet been formally signed, the market has obviously already reacted in advance. Trump previously stated that the US and Iran have reached an agreement on the framework of the deal, and the official signing ceremony is expected to take place this week. As a result, international oil prices have dropped significantly, and US stocks continue to rise. However, some economists caution investors to remain cautious. Chief US Economist at Santander US Capital Markets, Stephen Stanley, stated, "The market seems to have directly assumed that the agreement will definitely succeed, and that the Middle East situation will quickly return to its pre-conflict state. Looking at asset prices, the market is currently trading in the most optimistic scenario." Stanley described the process of the Strait of Hormuz returning to normal operations as similar to the recovery process of a large airport after a snowstorm. "Even when the snowstorm ends, it takes time to get the planes back in the right position and resume normal operations." Similarly, even if the war ends, the global energy transportation system will also need time to recover. For the Federal Reserve, the peace agreement could also be a positive signal. Previously, rising energy prices pushing inflation back up had caused the market to significantly increase expectations of a rate hike by the Federal Reserve this year. Now, with oil prices falling, the pressure on policymakers has eased. Although the agreement news will not affect this week's Fed policy meeting, economists believe it may provide room for a discussion on future rate cuts. Some market participants believe that if inflation continues to fall in the coming months, the necessity of further rate hikes by the Federal Reserve will significantly decrease. For Trump, the trend of inflation also holds important political significance. During his campaign, Trump promised to quickly lower prices after taking office, and the continuous rise in gasoline prices over the past few months has been one of the important factors dragging down his approval ratings. According to data from the American Automobile Association (AAA), the current average gasoline price in the US is around $4.07 per gallon. Although it is significantly lower than the peak of $4.56 in May, it is still far higher than the level of around $3.13 when Trump returned to the White House. Therefore, even as oil prices continue to fall, consumers' sensitivity to high prices is unlikely to disappear in the short term. It is worth noting that American consumers have shown resilience during this energy shock. In the past few months, despite the continuous rise in oil prices and living costs, overall consumer spending by US residents has continued to grow. However, high inflation has begun to erode residents' real incomes. Data shows that US inflation has been higher than wage growth for two consecutive months, indicating a decrease in residents' purchasing power. Neil Dutta, Head Economist at Renaissance Macro Research, stated that even if the war ends, it does not mean that consumers will immediately increase spending. "I don't think consumption will rebound quickly. But falling oil prices can help households rebuild savings buffers, as real incomes are expected to gradually resume growth." In fact, some positive changes have already been reflected in consumer confidence data. A recent survey by the University of Michigan shows that US consumer confidence index rose for the first time in four months in early June, and one of the key reasons driving the improvement is the decrease in gasoline prices. However, Marc Giannoni, Chief US Economist at Barclays PLC Sponsored ADR (BARC.US), believes that the overall trend of slowing consumer growth has not changed. "Even with some relief in inflation pressure, we still expect US consumer spending to continue slowing down for the remainder of the year." Although the market is optimistic about the US-Iran agreement, economists generally believe that it is still too early to determine that all risks have been completely eliminated. Christiane Baumeister, Energy Economics Professor at the University of Notre Dame, stated that even if everything goes according to plan, it may take until the end of this year for the volume of transportation through the Strait of Hormuz to return to pre-war levels. Meanwhile, damage to some infrastructure could still limit the pace of energy inventory replenishment in the coming months, providing support for oil prices. Overall, as the US-Iran peace agreement progresses, the inflationary impact of the war may be nearing its end. However, for the US economy, the more critical issues have shifted from energy prices to slowing income growth for consumers, weakened consumption momentum, and a slowing economic growth rate. In the coming months, whether the US economy can achieve a soft landing goal of "falling inflation while maintaining stable growth" will continue to be the core focus of the market.