Iran war: Look beyond stocks to understand state of economy, experts say

The escalating conflict between the US and Iran is reshaping economic expectations beyond traditional market indices. According to Michael Klein, a professor of international economic affairs at Tufts' Fletcher School, the real economic signals emerge from bond yields and inflation expectations rather than stock price movements alone.

The 10-year US Treasury yield has climbed to 4.6 percent, its highest level in a year, reflecting investor concerns about rising inflation. This increase makes borrowing more expensive for businesses and can slow economic growth. Lenders demand higher yields to compensate for the erosion of purchasing power caused by inflation, Klein explained.

The strategic Strait of Hormuz, through which one-fifth of global oil typically flows, remains largely closed following the conflict's escalation. A brief period of relief occurred after the US and Iran signed a memorandum of understanding to extend their ceasefire in mid-June, during which oil prices fell and consumer prices declined 0.4 percent monthly. However, the agreement has since deteriorated, and Brent crude has rebounded to around $88–$91 per barrel, with US petrol prices climbing to $4 per gallon.

Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security, noted that markets initially overestimated the durability of improved oil flows following the agreement. The recent collapse of the memorandum has reversed those gains, reintroducing conflict risk premiums into energy prices. Traders now assign a 55 percent probability to a US interest rate increase in September, according to the CME Group's FedWatch tool.