A MARTÍNEZ, HOST:
A fresh round of strikes between the U.S. and Iran is triggering a bump at the gas pump. Gasoline prices went up overnight after the ceasefire broke down, and the fighting over the Strait of Hormuz also adds more uncertainty to the global economy. NPR's Scott Horsley joins us now. Scott, how big of a bump are we talking about?
SCOTT HORSLEY, BYLINE: A, AAA says the average price of gas jumped a nickel a gallon overnight. It's now 86 cents a gallon higher than it was before the war began. But it's not nearly as high as it was back in May, when gas prices topped out around $4.56 a gallon. Ryan Sweet, who's with the forecasting firm Oxford Economics, says analysts are not really sure how big or persistent this latest disruption in the Strait of Hormuz might be.
RYAN SWEET: No one really knows how this is going to play out. And it seems that financial markets are trying to figure out, is this the beginning of an escalation in tensions, or is this just a hiccup in negotiations?
HORSLEY: Even though President Trump declared yesterday that the ceasefire was over, he did leave some wiggle room for talks with Iran to continue. And, you know, we've seen multiple times already during this conflict that harsh rhetoric gives way to further negotiations, so stay tuned.
MARTÍNEZ: All right. Now, rising gas prices have already contributed to higher inflation. So how is the Federal Reserve going to react?
HORSLEY: Well, this might make the federal - might make the central bank more cautious about cutting interest rates anytime soon. It's possible the Fed could even raise interest rates when policymakers meet in a few weeks. But right now, investors think that's not very likely. You know, energy prices are notoriously volatile. They go down and up. And Sweet says given its limited tool kit, there's not a whole lot the Fed can do about rising gas prices.
SWEET: They're not drilling oil. They're not driving container ships. So that's a supply shock. And raising or lowering interest rates is ill-equipped to address supply shocks.
HORSLEY: Interest rates tend to work on demand rather than supply. And demand for gasoline typically doesn't change that much, so long as people have to get to work or school or wherever. Rising gas prices were a big driver of inflation this spring, and it's possible they could be in July, as well, if they continue to go up.
MARTÍNEZ: Yeah. And I got to imagine that there are other drivers pushing inflation higher.
HORSLEY: Yeah. It's not just gasoline. We've also seen a huge amount of spending on data centers around the country to support artificial intelligence, and that is increasing the price of all kinds of building materials and also electronic equipment. Federal Reserve Chairman Kevin Warsh thinks eventually artificial intelligence is going to help to curb inflation by making workers more productive. But in the short term, it's having the opposite effect.
On top of that, the White House is preparing to impose a whole new round of tariffs later this summer, and that has the potential to raise prices on lots of imported goods. So Sweet says there are just a lot of moving pieces to keep your eye on.
SWEET: The big domino, of course, is the Middle East. If the peace deal breaks and falls apart and then on top of that we get additional tariffs, you're setting yourself up for potentially another round of stronger inflation, which particularly hurt lower-income households.
HORSLEY: Families at the bottom of the income ladder have already been hitting a wall with the high cost of living. They got a little bit of a breather earlier this year when they got their tax refunds. Those were on average about 11% bigger than they were last year. But for a lot of families, those tax returns - tax refunds, rather - have already been spent by now, and, you know, their paychecks are not keeping up with the rising prices. If that continues, we could start to see some drop-off in consumer spending. And because consumer spending is such a big part of the overall economy, that could really tap the brakes on economic growth.
MARTÍNEZ: That's NPR's Scott Horsley. Scott, thanks.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.
NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.
