Iran's Involvement In Israel-Hamas Conflict Is Key For The Future Of US Inflation

The outbreak of war in the Middle East is threatening to hamper the Fed's efforts to control inflation.

A Thursday visit from Secretary of State Antony Blinken to Israel was confirmation of unconditional support from the U.S. for Israel in its war against Palestinian terrorist organization Hamas.

Israel’s military reported on Thursday afternoon that over 1,200 people, including at least 27 Americans, have been killed by Hamas’ attacks, with around 2,800 individuals injured. In response to these attacks, Israeli counterstrikes in Gaza have resulted in the deaths of approximately 1,537 individuals, according to the Gaza Ministry of Health, CBS News reported.

On Thursday morning, International Monetary Fund managing director Kristalina Georgieva expressed concern over how the conflict could affect global oil markets, which are liable to be disrupted by war in the Middle East, where roughly a third of the global oil output is produced.

While the specific area where the conflict is located is not a significant oil-producing region, major disruptions in the global oil markets could come if further conflict arises between the U.S. and Iran, a long-time backer of Hamas operations against Israel.

Earlier this week the Iranian government denied having any relationship with the Hamas attacks, as Supreme Leader Ayatollah Ali Khamenei said "We defend Palestine, we defend the fights." This denial is contradicted by reports that Iran had a direct role in training Hamas for the latest attack on Israeli civilians, according to The Wall Street Journal.

While Congress is preparing a $2-billion aid package for Israel, several prominent U.S. politicians denounced Iran’s participation in the massacre, proposing a double-down on oil sanctions.

Yet the already fragile relationship between the U.S. and Iran, the world’s eight largest oil producers, could still have an impact on oil prices, exacerbating inflation worldwide and in the U.S.

Also Read: Hollywood, Celebrities React To Israel Conflict: ‘I Stand With Israel You Should Too’ Israeli Actress Gal Gadot Asks For The World Not To Sit On Fence

Israel-Hamas Different From Ukraine-Russia War: Last month, a prisoner swap between the U.S. and Iran emerged as the first sign of improving diplomatic relations after decades of tension over the Middle-eastern country's nuclear program. Iran's reported military assistance to Russia in the war on Ukraine has also been met with discontent in Washington.

Russia's invasion of Ukraine in February 2022 launched a world-wide energy crisis which impacted most economies as the world recovered from the economic consequences of the COVID-19 pandemic.

But the impact on oil prices stemming from the Israel/Hamas conflict is different in nature.

Energy prices spiked after the Ukraine invasion as the Western world imposed sanctions on Russia, which at the time remained a major supplier of natural gas to the European Union. Russia is also the third-largest oil producer, accounting for about 10% of global production.

The Israel-Hamas conflict's capacity to impact global oil prices is directly dependent on Iran’s level of involvement in the war on Israel. Iran controls the Strait of Hormuz, where an estimated 20-30% of global oil inventory passes.

That scenario would put pressure on the U.S. and other Western nations to increase sanctions on Iran, shrinking the supply of oil to the West and raising barrel prices.

Conflict Could Affect Consumer Prices: Inflation in the U.S. has fallen to an annual 3.7% for both August and September, as per data released by the Department of Labor on Thursday. While the rate is significantly lower than the peak of 9.1% reached during June 2022, it remains high above the 2% goal that the Fed is chasing by maintaining decades-high interest rates.

The threat of energy prices affecting recent victories over inflation was highlighted as a major risk by Fed officials in minutes from the latest FOMC meeting, also released Thursday, where Fed governors voted to maintain the federal funds rate at between 5.25% and 5.50%.

On Wednesday, the CEO of oil exploration company Pioneer Natural Resources PXD told CNBC that "If Iran enters the war, we’re going to see much higher oil prices."

The price of a barrel of oil is behind gas prices, a major consumer staple in which Americans spend an average 3% of their total budget. Oil prices also affect the cost of airline tickets, as well as the cost of shipping, which is then transferred to the rest of the supply chain, reaching the price of consumer goods.

Stocks To Watch: Rising oil prices could have a positive effect on the bottom lines of U.S.-based oil extraction companies, like Exxon Mobil XOM, Chevron CVX and Shell SHEL .

ETFs like the United States Oil Fund LP USO, the iShares U.S. Oil & Gas Exploration & Production ETF IEO and the ProShares Ultra Bloomberg Crude Oil UCO closely follow the oil industry.

If inflation spikes again, most industries will suffer. But the 2022 spike saw some companies more effected than others. Tech companies were among the worst hit by rising inflation, which had a major toll on the stocks of Apple AAPL, Amazon AMZN and Meta META during 2022.

Industries navigating the consumer discretionary rail could also take a big hit. These include automakers like Tesla TSLA, General Motors GM, Ford F and Volkswagem VWAPY.

The Consumer Discretionary Select Sector SPDR Fund XLY and the Vanguard Consumer Discretionary ETF VCR are two ETFs following this sector.

Some other major stocks in consumer discretionary include Nike NKE, Lululemon LULU Starbucks SBUX, McDonalds MCD, Home Depot HD Airbnb ABNB and Booking Holdings BKNG.