The Iran war may be winding down, but Paul Krugman isn't optimistic that economic relief is coming to the US soon.
President Donald Trump has said that a peace deal with Iran is close, and that shipping through the critical Strait of Hormuz is set to resume. He had previously said that the US economy would see relief when the war ended, but in a Substack post on Tuesday, Krugman said there are a few big issues standing in the way.
"While consumers are getting some relief at the gas pump, they're facing persistent sticker shock on many other goods," he wrote.
Here are the three big sticking points he sees preventing the economy from returning to normal.
The state of the Strait
One of Krugman's central arguments is that even if the Strait of Hormuz fully reopens, oil prices won't be quick to stabilize. In fact, it will likely take months for them to return to normal levels for a few reasons.
"First, there has been substantial damage to the Persian Gulf's infrastructure, which will take months, if not years, to repair," Krugman noted. "Second, many oil tankers are now in the wrong place and it will take weeks or months to move them. Third, some shipping channels are at risk from stray mines."
The economist also highlighted the fact that many countries responded to the Strait's closure by dipping into their own oil reserves, which they will need to address, thus keeping demand elevated.
Rockets and feathers
Krugman used a well known economic analogy to highlight how gas prices and crude oil do not move in lockstep.
"When there is a global shock that causes the price of crude oil to soar, gasoline prices rise like a rocket," he stated. "But when the crisis is over and crude prices plunge, the price of gas declines only gradually — it drifts down like feathers."
Gas prices recently dipped below $4 per gallon for the first time in months. But if the rockets and feathers principle applies, Krugman preditcs gas prices won't drift back down to pre-war levels for months.
Price surges beyond gas
High gasoline prices aren't the only factor spiking costs for consumers. Diesel costs also surged as a result of the Strait's closure and as diesel is primarily used for shipping, businesses have seen their input costs rise.
When costs rise for companies, the increase is often passed on to consumers. Krugman noted that while this hasn't happened yet, it is likely to play out in the coming months, offsetting relief that consumers are feeling at the gas pump.
In addition, Diesel costs aren't the only concerning factor that he sees.
"The Persian Gulf is normally a key supplier of many chemicals, whose prices soared when the Strait of Hormuz was closed," Krugman added. "The price of urea, a key fertilizer with industrial uses as well, temporarily rose by 75 percent when the Strait was closed. Some of the effect of these cost shocks still hasn't hit consumer prices."
