By Megan Leonhardt
The cease-fire between the U.S. and Iran may have spurred a market relief rally among investors on Wednesday, but consumer demand is unlikely to bounce back as quickly.
The onset of the Iran War in late February sent oil prices soaring and boosted prices at the pumps nationwide. That's expected to squeeze household budgets and slowly eat away at consumer demand, slowing both aggregate spending and economic growth this year.
Even if the cease-fire holds -- and there were reports that Iran had closed the Strait of Hormuz again Wednesday, which could incite more fighting -- economists expect that U.S. economic activity will still take a hit, particularly in the second quarter. Higher tax refunds should help largely cushion consumer spending during the first quarter. But with firmer headline inflation and a higher baseline price for oil expected to linger for several months, barring any major reversals, the drag on growth is baked in at this point.
Oil prices fell sharply in the wake of the cease-fire announcement, but prices at the pump haven't budged. AAA reported Wednesday that the national average for gasoline was $4.16 per gallon, up from Tuesday's $4.14 per gallon average.
Already, consumer prices rose by a full percentage point in March, squeezing household budgets on other items, says Michael Pearce, chief U.S. economist at Oxford Economics. Economists expect Friday's release of the consumer price index to show inflation hit 3.7% year over year in March, up from February's 2.4% pace.
The magnitude of the ongoing hit to consumer spending, in particular, hinges on where domestic oil prices settle, says Joseph Brusuelas, chief economist at RSM. WTI (West Texas Intermediate) crude oil prices, the primary benchmark for U.S. oil prices, opened at $73.60 on Wednesday. But Brusuelas expects the baseline for WTI to be around $85 per barrel this year.
How accessible the Strait of Hormuz remains to shipping will also play a role. So far on Wednesday, there were four tanker crossings, according to Bloomberg. That's slightly higher than the daily average of vessel crossings during the past week.
For now, the drag from higher gas prices is being offset by the increased tax refunds, but that will begin to change the longer oil prices remain elevated, Pearce says.
The tax refunds are running about 14% higher than last year, which translates into a gain of roughly $290 per household, according to Greg Daco, chief economist at EY Parthenon. But the oil price shock, assuming the cease-fire lasts, would amount to a loss of $350 per household.
"Whether one assumes at $80, $90, or $100 as the baseline until pre-war levels of production in the Gulf can be re-established its hard to make the case that the impact from the ONBBA will not be at best partially offset or at worst lost as an unintended consequence of the choice to go to war," Brusuelas says.
The destruction in consumer demand started down-market among the low- and middle income households, Brusuelas says. The cease-fire means that oil is unlikely to hit $125 per barrel, which should help the U.S. avoid a broadening out of the drag on demand upmarket.
Pearce expects consumer spending to rise by just 0.6% annualized in the second quarter, a pullback from the 1.2% annualized growth expected in the first quarter.
That all means the first half of 2026 is shaping up to be even softer than the fourth quarter of 2025, when consumer spending grew by 2%. Although the government shutdown subtracted about a percentage point of economic growth, the softer spending also contributed to the dismal 0.7% growth rate in inflation-adjusted gross domestic product.
The U.S. economy is a "$30 trillion dynamic and resilient beast" that will absorb the shock better than the other G-7 economies, Brusuelas says. Still, even without broad-based demand destruction, Brusuelas reduced his 2026 GDP forecast from 2.4% to 1.7% due to the limited demand destruction that is currently occurring. And that's not shifting in the wake of the cease-fire.
"We are not anticipating a restoration of the status quo ante on growth, employment, inflation, oil prices or gasoline prices given the dynamics of the conflict at this time," he adds.
Write to Megan Leonhardt at megan.leonhardt@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 08, 2026 13:49 ET (17:49 GMT)
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