Hormuz Oil Shock Cuts Real Incomes Across US, Europe as Inflation Outruns Pay

The energy supply shock caused by the closure of the Strait of Hormuz has reduced real incomes across major advanced economies including the US, UK, Japan and the European Union. The disruption, triggered by the US-Iran war, is also raising concern that the damage could spread to labor markets and deepen stagflation fears.

US consumer prices rose 3.8% in April from a year earlier, according to Bureau of Labor Statistics data released on May 26. Average hourly earnings increased 3.6% over the same period, leaving inflation ahead of wage growth. Real wages for US workers have now fallen for the first time in about two years.

A similar pattern is emerging elsewhere. In the UK, real wage growth excluding bonuses was just 0.1% in the first quarter. In Japan, wage gains have lagged inflation for four straight years. The Ministry of Health, Labour and Welfare said real wages per worker at companies with at least five employees fell 0.5% in 2025 from a year earlier. Across the euro area, real wages are effectively flat. The Financial Times said Europe's real wages, which had only just recovered from the inflation shock caused by the 2022 war in Ukraine, have been hit again.

There is growing concern that weaker consumer purchasing power could tip economies into recession. Diane Swonk, chief economist at KPMG US, said high inflation would squeeze corporate profits and hurt employment. If workers push for higher pay, inflation could become even more prolonged, she added.

The shock is also complicating the policy outlook. In the US, there is analysis that much of the effect of the Trump administration's tax rebate policy has been offset by rising prices. Jim Lee, chief financial officer at Target, said the benefits from tax rebates would gradually fade by year-end. Most advanced economies, including France, are already grappling with fiscal strains, leaving little room for measures such as tax cuts or subsidies.

The situation is fueling debate over whether central banks will have to raise interest rates. Expectations for further tightening by the Fed are rising. Isabel Schnabel, a member of the European Central Bank's Executive Board, told Reuters that markets would still suffer heavy damage even if the war ends, and argued that a June rate increase was needed. Yang Jun-seok, an economics professor at the Catholic University of Korea, said real wages tend to follow prices with a lag, making it more likely policymakers will try to contain inflation first through higher rates.

Han Myung-hyun, Hankyung.com reporter, wise@hankyung.com