The stalemate in the War of Iran is characterized by bets on each side that the enemy side will soon incur unsustainable economic problems.
After several wars and decades of sanctions Iran is well versed in how to sustain under economic pressure. Its people and government know of the larger picture. Price fluctuations are inconveniences but do not change the will of the people.
The U.S. on the other side is rather fragile. Even only mildly unconformable circumstances will lead to political pressure. One percent more or less of inflation will change the election chances for this or that party.
The consequences of the blockade of Hormuz are starting to come in:
US inflation jumps to 3.8% as energy costs surge from Iran war – BBC
US prices rose in April at their fastest rate since May 2023 as the impact of the war in Iran was increasingly felt by consumers.
A jump in the cost of gasoline and groceries pushed the consumer price index (CPI), showing the rate prices rose by in the past 12 months, to 3.8%.
It is the highest level since inflation hit 4% three years ago.
The Bureau of Labor Statistics (BLS) said almost half of the rise was driven by surging energy costs, while housing and food costs also contributed.
Consumer inflation can be a short term trend. More worrying than the rise in the CPI is the increase of input prices as reflected in the Producer Price Index (PPI):
Wholesale inflation jumps 6% in April on annual basis, biggest increase since 2022 – CNBC
Wholesale prices in April posted their highest annual increase in more than three years, signaling more nettlesome inflation as pipeline costs intensify.
The producer price index rose a seasonally adjusted 1.4% for the month, much higher than the 0.5% Dow Jones consensus forecast and the upwardly revised 0.7% March increase, the Bureau of Labor Statistics reported Wednesday. This was the largest monthly gain since March 2022.
On an annual basis, the index was up 6%, the biggest increase since December 2022.
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Energy was at the root of the unexpectedly high gain in producer prices, as it was for a surge in consumer prices that the BLS reported Tuesday, though there was evidence that the price pain is extending beyond the gas pump.
Each of the goods missing due to the blockade of the Strait will lead to price increases. Some increases, like those for refined petroleum products – gas and diesel, will show up immediately. Lack of others products, like naphtha, sulfur and urea, will take several months to be felt.
Soon products will start to vanish from stores. Lubricants, like motor oil and grease, are candidates. Several of the myriads of plastics we are used to use will soon be missing.
What are you going to do if waste bags are missing?
Each lack of a product has its own consequence, sometimes in unexpected places. Here its is the housing market in Japan from where trouble might well flow into financial markets:
Hormuz closure stalls construction projects as material costs soar (archived) – FT
Masatomi Maeda, chair of Hiroshima-based Maeda Housing, said about a quarter of its projects have been delayed within the past month as suppliers could not confirm delivery dates for goods including PVC piping, insulation materials and prefabricated bathrooms.
Builders say the absence of a single part, adhesive or material is enough to hold up an entire project.
“We have around 20 contracted projects that we can’t start work on smoothly,” said Maeda. “We already expect completion payments to be delayed by two or three months. If two months of sales disappear, I think there will be companies who won’t have enough working capital.”
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Yoshihide Kimura, chief executive of Toyama-based contractor Tomiso, said that emails and faxes poured in last month notifying him of “extraordinary” increases. PVC prices, for example, jumped as much as 70 per cent, he said.Kimura said that his firm could not pass on the costs to customers, as they would need to renegotiate housing loans, and the uncertainty was causing customers to hold back.
“Everyone feels stuck,” he said.
Even if the Strait would reopen tomorrow it would take twelve to eighteen months for oil wells to be pumped again, storages to be refilled and production chains to go back to normal. As the conflict is likely to re-ignite we can expect years of supply problems.
Today’s increase of CPI and PPI numbers is just the beginning of larger increases in the cost of living.