Rising Oil Prices and Cautious Shoppers Are Squeezing U.S. Retailers
U.S. consumer spending was already showing signs of strain before the Iran conflict sent oil prices surging. Now retailers face a compounding set of pressures as higher energy costs, rising debt, and softening sentiment converge on household budgets at the same time.
Shoppers Were Pulling Back Before the Oil Shock
The warning signs predate the conflict. According to Retail Dive, consumers had begun shifting toward caution even before the Iran war's oil price spikes, showing signs of reduced buying activity across discretionary retail categories.
That pullback came despite some surface-level resilience. January retail sales in discretionary categories rose 6% year over year, but analysts caution that figure is now outdated given how quickly conditions have changed. As the Wells Fargo economist group noted in a recent report, the Iran conflict is “adding fresh inflation risk to an already fragile backdrop,” with the latest inflation measures showing progress stalling.
Oxford Economics has revised its forecast for U.S. consumption growth down to 1.9% for 2026, from 2.5% in February. That would be the slowest pace since 2013, excluding the pandemic. Spending on durable goods and discretionary services faces the most risk.
What the Oil Shock Is Doing to Household Budgets
The Iran conflict and the subsequent closure of the Strait of Hormuz have caused Brent crude to surge past $110 a barrel, up roughly 43% from pre-war levels. The national average for gasoline has climbed to $3.88 per gallon, up 30% from before the conflict began. U.S. diesel prices have topped $5 per gallon for the first time since Russia's invasion of Ukraine in 2022.
The scale of the supply disruption is significant. Over 11 million barrels per day have been pulled from global markets since the conflict began, making it one of the largest supply shocks in the history of the global oil market.
For households, the math is direct. The National Retail Federation's chief economist Mark Mathews noted that U.S. households spend an average of $2,500 a year to fill their tanks. Even a $10 increase in weekly gas costs puts pressure on discretionary spending. Moody's Analytics chief economist Mark Zandi warned that higher energy costs paired with a declining job market risk triggering a “self-reinforcing negative cycle” of weakening consumer spending, business pullback, and layoffs.
Related reading: Shipping Rates 4x Higher Amid War Risk
How This Hits Retailers
The effects are not uniform across retail. UBS analysts have noted that while some retailers like Costco have historically held up during oil price spikes, companies serving lower-income shoppers such as Dollar General and Ollie's Bargain Outlet are likely to see sales decline as budgets tighten. Discretionary-heavy retailers like Five Below and Target face added headwinds as consumer confidence weakens.
Wells Fargo research on oil price shocks over the past 25 years found that when gasoline approaches $4 per gallon, discretionary spending takes a measurable hit. In the first three months after a price spike of that size, consumer spending contracts by around 180 basis points, then worsens to 240 basis points over the following six to nine months. Softlines retailers selling apparel could see a 200 to 300 basis point hit to comparable sales that worsens the longer prices stay elevated.
Retailers will also absorb rising transportation costs through higher diesel prices before passing them on to consumers, echoing the pattern seen with tariffs earlier in the year.
What to Watch
Morgan Stanley analysts note that real consumption typically begins to decline two to three months after an oil price shock and can remain depressed for another five to six months. The duration and persistence of elevated energy prices will determine how deep the pullback goes.
The Strait of Hormuz remains closed at the time of writing, and Iran's new supreme leader has stated that the closure should continue as a tool of pressure. For retailers and sellers planning inventory and pricing for the coming months, the trajectory of the conflict and oil markets is the single most important variable to track.
