Written by Shane Balkham
Iran hostilities reignited, forcing the US to reimpose a naval blockade on Iran, resulting in the Houthis (an Iranian-sponsored militia in Yemen) declaring a blockade of Saudi ports and firing on two Saudi oil tankers in the Red Sea. Energy markets reacted by driving oil prices higher to over $100 a barrel for Brent crude, from just $70 a barrel three weeks ago, suggesting more pain at the pump is on the way. The risk to energy prices is much higher in this current round of escalation than in prior rounds, given how far governments have run down their emergency oil stockpiles since the war began.
We also saw a reignition of Trump’s tariffs. The US has changed the way it taxes many goods coming into the country. A temporary 10% import tax has ended and has been replaced with a new set of tariffs, mostly at 10% or 12.5%, depending on the country. The US says the aim is to put pressure on countries to do more to stop products made with forced labour from entering supply chains.
For consumers, this matters because tariffs can raise costs for businesses that import goods, and some of those extra costs may eventually be passed on through higher prices. The impact will depend on what the product is, where it was made, and whether it qualifies for an exemption. Some goods that were already on their way to the US received a short grace period, while some products covered by other trade rules may not face the new charge. Overall, the change creates more uncertainty for retailers, suppliers and consumers, especially for goods with global supply chains.
There are echoes between the war in Iran and the war on trade. Last year, threats over tariffs provoked significant market moves, in the same way the conflict in the Gulf initially created significant moves in the market. In both these instances, the market reactions contributed to a quick change in policy.
It might be expected that the continuing war in Iran would be bad for inflation; however, US inflation in June, measured by the Consumer Price Index (CPI), was well below expectations. UK headline inflation, which covers the whole basket of everyday goods and services, was also slightly below expectations for the third consecutive month, falling to 2.6% for the year to June. Inflation risks are rising again, which will not make the discussions for central bank meetings this week any easier. Both the Federal Reserve and Bank of England will give guidance on interest rates. The expectation is for both central banks to hold off on any decision until the outcome of the Iran war is clearer, which makes the meetings in the middle of September more important.
In the UK, we have a new Prime Minister and a new Chancellor of the Exchequer. Andy Burnham’s decision to appoint the former defence secretary John Healey as chancellor, replacing Rachel Reeves, came as a surprise to many. This will naturally lead to fresh questions over tax and government spending. In the short term, this new government does not seem likely to shock the financial markets. It is important to remember that the key to successful long-term investing is to have an appropriately diversified portfolio and to remain invested.
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