Economics viewpoint Get ready for a price shock - with the poor hit hardest

Donald Trump’s assault on Iran and the deadly conflict it has unleashed is grim and unprecedented - but there is a familiarity to its economic consequences: brace yourself for another price shock.

- Heather Stewart

From the Covid shutdown and subsequent reopening to Russian tanks rolling into Ukraine, the global economy has been rocked by one cost surge after another.

Meanwhile, the climate crisis means more volatility in the cost of commodities whose production is vulnerable to extreme weather events - coffee, cocoa and olive oil.

The reaction to Trump’s Operation Epic Fury in the energy markets was initially relatively restrained. On Friday, though, with the critical strait of Hormuz in effect closed, and reports of production cuts in Kuwait, the dam seemed to break, pushing oil to $90 a barrel.

Oil shocks are especially painful because of the commodity’s wider uses, not least in fertiliser, and the knock-on effects for manufacturing and transport.

And poorer people are hit hardest. Recent research published by economists at the University of Massachusetts Amherst identified energy, along with food and agriculture, as among the commodities that had “a disproportionate capacity to increase inequality when their prices rise”.

Where there are benefits, these are narrowly shared. Another striking recent paper showed that after the 2022 oil price surge in the US, 50% of the windfall benefit from higher prices in the sector went to the wealthiest 1% of individuals, via the stock market. The bottom 50% received only 1%.

As Gregor Semieniuk, the lead author, puts it: “While everybody is bearing the inflation costs of an energy price crisis, which drove inflation in 2022, the very prices that are causing this inflation are also giving extraordinary profits to mostly a small minority of very affluent shareholders.”