The bottom line first: Rising gasoline prices are a burden for consumers and will likely contribute to higher headline inflation. However, history shows that both the economy and financial markets have worked through periods of rising energy costs before. Staying focused on long‑term financial goals, rather than reacting to daily news cycles, has historically been a more durable approach during periods of uncertainty.
For most Americans, the price of gasoline at the pump is one of the most direct ways the conflict in Iran affects everyday life. Gasoline prices are prominently displayed and updated frequently, and filling up on a weekly basis is often a basic necessity to commute to work, school, buy groceries, and more. Diesel prices are just as important since they affect the transportation and manufacturing costs of many goods across the economy. This is why these prices serve as key economic indicators, and why the ongoing situation in the Middle East has become a growing concern for consumers and households.
As the conflict enters its second month, with new headlines ranging from proposed peace agreements to possible escalation on a daily basis, oil prices continue to remain high with large intraday swings. Brent crude is now trading above $110 per barrel and WTI above $100, meaning that higher energy prices will affect household budgets, inflation metrics, and Federal Reserve decisions.
The 1970s energy crisis is perhaps the most commonly cited historical example of how high oil prices can reshape consumer behavior and the broader economy for years. During that decade, two separate oil embargoes led to long lines at gas stations, rationing, and a shift in how Americans thought about energy consumption and security.
Fortunately, today’s situation differs in important ways. The lasting impact from the 1970s and early 1980s included a wave of investment in domestic energy production and fuel efficiency measures that have changed the sensitivity of the U.S. economy to oil spikes. The U.S. is now the world’s largest oil producer, inflation had been trending lower before this shock, and financial markets have historically adjusted and moved forward once the initial disruptions fade. While there could continue to be challenges for consumers, perspective and patience remain essential for people with long‑term financial plans.
Gasoline prices have risen sharply
The national average for regular unleaded gasoline has climbed to around $4.00 per gallon, an increase of more than a dollar per gallon in just a month. While this is still below the record high of $5.00 per gallon reached in 2022, it could worsen if oil prices remain high.
The impact of higher gasoline prices on consumers is both direct and indirect. A simplified back‑of‑the‑envelope calculation shows how this affects everyday consumer spending depending on income. If we suppose the average fill‑up is 15 gallons, then the current increase adds $15 to each visit to the gas station. For those who fill up once a week, this amounts to roughly $780 less in their pockets per year.
At the federal minimum wage of $7.25 per hour, that would represent more than two additional hours of work per week just to stay financially afloat. The story is different for those at higher income ranges. The median American household earns just over $70,000 per year after taxes, according to the latest Census Bureau statistics, so this is slightly above 1% of after‑tax income. While this leaves less money available for discretionary spending or savings, it can likely be absorbed without causing significant financial difficulty.
Regardless of household income, higher gasoline prices effectively function as a direct tax on consumers.
From an economic standpoint, this can add up. When multiplied across millions of households filling up week after week, the cumulative impact on consumer spending and savings rates can be meaningful if oil prices stay higher for longer. However, it’s the indirect effects that are possibly more significant. Gasoline and diesel fuel are basic inputs into nearly everything the economy produces. Transportation, manufacturing, agriculture, and distribution all depend on energy, which means that higher fuel costs raise the price of goods and services across the board.
Gasoline prices are not just about oil
Understanding what drives gasoline prices can help put the current situation in perspective. According to the U.S. Energy Information Agency, roughly half of the price at the pump reflects the cost of crude oil itself. The other half consists of refining costs, transportation and distribution to gas stations, sales and marketing expenses, and federal and state taxes.
These costs are also why Americans in certain states pay considerably more than the national average for gasoline. The above chart, based on the latest available data which does not yet show the most recent jump in prices, illustrates how these components have shifted over time.
This relationship is partly why there is not a one‑to‑one connection between oil prices and gas prices at the pump. It also takes time for higher market prices, which adjust quickly in the futures market, to show up in what consumers experience. The chart also shows the annual change in the overall Consumer Price Index and the clear relationship with oil prices over time.
For those following financial markets, it’s also worth noting that the oil futures curve is deeply “backwardated” at the moment. This technical term means that oil prices are much higher today than they are expected to be in the future — a significant change from just a month ago when the curve was relatively flat. In other words, while present spot prices reflect the current Middle East supply disruption, market participants are also signaling that they expect oil prices to eventually decline once conditions stabilize. This does not guarantee a quick resolution and can change as new information becomes available, but it does suggest that today’s spike is widely viewed as a temporary shock rather than a permanent shift to higher prices.
Higher energy prices complicate the inflation picture
Higher energy prices will impact headline inflation, since these costs are important components of the Consumer Price Index. After several years of improving energy CPI readings, the recent jump in oil and gasoline prices will almost certainly push headline inflation higher in the coming months. Organizations such as the OECD now estimate that U.S. inflation could rise faster than expected this year.
This matters for several reasons. First, consumers are still recovering from the inflation surge after the pandemic. Second, both stocks and bonds have historically faced challenges when inflation rises unexpectedly, as higher costs pressure companies and reduce the real value of fixed income payments. That said, markets have demonstrated considerable resilience over the past several years, even in more difficult inflationary environments.
Third, and perhaps most immediately relevant for financial markets, rising inflation complicates the Federal Reserve’s decision‑making. Markets have already shifted their expectations, with traders now assigning a higher probability to the Fed holding rates steady — or even raising them — rather than cutting. This shift has introduced additional uncertainty across equity and bond markets.
Economists generally view these types of supply‑side shocks as temporary. This is not a prediction that high oil prices will quickly retreat, but rather an acknowledgment that energy price spikes have historically faded once supply disruptions ease.
While the situation is still challenging for consumers, it is materially different from the 1970s. The U.S. is now the largest oil and natural gas producer, and the Federal Reserve has more credibility in anchoring inflation expectations. Together, these factors suggest a more stable economic backdrop than in past energy crises. For individuals and families, this reinforces the importance of maintaining a long‑term perspective and avoiding decisions driven by short‑term headlines.