The average price of gasoline in the United States has risen above $4 per gallon for the first time since August 2022, driven by soaring fuel costs resulting from the conflict in the Middle East. Data from the American Automobile Association (AAA) showed that the national average retail price for regular unleaded gasoline reached $4.018 per gallon on Monday. Since the military conflict involving the U.S., Israel, and Iran began on February 28, the average price has surged by more than $1—a 35% increase from the $2.98 per gallon recorded just before the U.S. and Israel launched strikes against Iran. This sharp rise is comparable to some of the most significant price spikes over the past two decades and has occurred even more rapidly than the initial jump in oil prices following the outbreak of the Russia-Ukraine conflict in 2022.
The increase in U.S. gasoline prices mirrors price surges seen around the world since the onset of the Middle East conflict. For instance, gasoline prices in Japan hit a record high earlier this month, while countries like Sri Lanka and Thailand have also experienced sharp increases. Supply shortages have emerged in some regions, such as Australia, where certain gas stations have run out of fuel.
Rising fuel prices present a significant challenge for the Trump administration ahead of the midterm elections. Gasoline prices are one of the most visible indicators of inflation for American consumers. Although current prices remain below the historic peak of over $5 per gallon seen after the Russia-Ukraine conflict in 2022, the rapid upward trend has already raised concerns. The surge undermines a key political promise made by former President Trump to curb inflation and casts a shadow over his economic agenda as the midterm elections approach. Analysts suggest that persistently high oil prices could adversely affect Republican prospects in the November elections, where control of Congress will be contested. Voters are already expressing dissatisfaction with high living costs and Trump's economic management.
In his State of the Union address last month, Trump highlighted falling gasoline prices and declared that inflation was "plummeting." The recent reversal in oil prices directly challenges that narrative. In response, the Trump administration is urgently evaluating various intervention measures to curb further price increases. The White House has already implemented several policies, including a 60-day waiver of the Jones Act to allow foreign-flagged vessels to transport fuel between U.S. ports, and a fifth consecutive year of exemptions for E15 gasoline from summer volatility requirements. However, these measures have so far failed to effectively lower fuel prices.
A poll conducted from March 19 to 23 indicated that approximately 61% of adults disapprove of Trump's handling of the economy. Research by Ryan Cummings and Neil Mahoney of the Stanford Institute for Economic Policy Research suggests that a $1 per gallon increase in gasoline prices could reduce consumer confidence by 4.5 points or more in the University of Michigan survey, even when accounting for other economic factors. Cummings, who worked on gasoline policy at the Council of Economic Advisers from 2021 to 2023, noted that this "roughly implies a 5% deterioration in people’s perception of the economy for every $1 increase in gas prices."
Beyond the political risks for Trump and the Republican Party in an election year, rising gasoline prices also pose challenges for the Federal Reserve as it seeks to balance inflation control with employment support. Since the Middle East conflict began, the key oil transit route through the Strait of Hormuz has been largely closed, leading to sharp increases in crude and fuel prices, with particularly noticeable jumps in consumer products like gasoline and diesel. With no signs of the conflict easing and former President Trump threatening to target Iran's energy infrastructure if a peace agreement is not reached, oil prices remain elevated. On Monday, WTI crude futures settled above $100 per barrel for the first time since 2022.
The sharp rise in oil prices has heightened concerns about a resurgence of inflation, leading markets to previously price in expectations of a Fed rate hike this year. However, attention has since shifted to fears that the Middle East conflict could exacerbate an economic slowdown, prompting traders to abandon bets on further Fed tightening. In a speech at Harvard University on Monday, Fed Chair Jerome Powell stated that the central bank has limited ability to counteract supply-side shocks, such as the oil price surge triggered by the conflict. His remarks eased market concerns that the Fed might be forced to tighten monetary policy aggressively to combat inflation, leading traders to begin pricing in the possibility of rate cuts later this year, albeit with low probability.
Earlier last week, futures markets had fully priced in one rate hike by the end of the year. By Friday, the likelihood of a hike remained high, but by Monday, market sentiment had reversed sharply, with traders assigning a 20% probability of a rate cut before the December meeting. This shift also pushed short-term U.S. Treasury yields down by more than 10 basis points on Monday. Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, commented, "The market is uncertain how to respond to recent geopolitical events—whether to focus on the first-order inflation shock or the second-order growth shock. Not only is the geopolitical outlook unclear, but there is also little clarity on how the Fed will respond to these scenarios."
Jeffrey Sherman, deputy chief investment officer at DoubleLine Capital, recently argued that Fed policymakers should avoid overreacting to oil-driven inflation and instead keep monetary policy focused on the already softening labor market. In a media interview, he suggested that the shock from soaring international oil prices effectively acts as a form of monetary tightening, reducing the need for additional Fed intervention. Goldman Sachs strategist Dominic Wilson expressed a similar view in a research note, stating that markets have overreacted to the oil shock by betting on Fed tightening, but historical patterns suggest such a response is unlikely. Goldman's analysis, based on the 1990 oil supply shock, noted that bond yields surged as investors anticipated Fed tightening, but the central bank ultimately cut rates as economic conditions deteriorated.
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