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Germany Is Reinventing Itself as a Weapons Factory

As autos and heavy manufacturing falter, Berlin is steering factories, workers and capital toward rearming Europe

BERLIN—As its export model breaks down, Germany is pivoting from cars to cannons—and trying to turn industrial decline into a defense boom.

After decades as Europe’s manufacturing engine, the country is mired in its longest stretch of stagnation since World War II as it wrestles with competition from China and a slump in demand. The response is as stark as the crisis: recasting its industrial base as the West’s arsenal.

A mesh of data points reveal how the old model has cracked. Each month, roughly 15,000 jobs are disappearing from German manufacturing, including the once-dominant auto sector, according to government figures. Mercedes-Benz posted a 49% drop in profit for 2025, while Volkswagen, the world’s second-largest carmaker, said its profit dropped 44% in the same period and announced plans to cut 50,000 jobs in Germany by 2030.

Even flagship brands such as Porsche are reporting staggering hits, with operating profit sliding 98% compared with 2024, which was already one of its worst years in modern history. Much of the heavy lifting in the German economy is now being done by the services sector, which comprises around 70% of economic output, though manufacturing still accounts for 20%—and up to a fifth of all services are tied to industrial firms such as carmakers.

Now, as American security guarantees look less certain and Europe races to rearm, Berlin is positioning itself to become the backbone of the continent’s defense industry.

The car industry is going through a crunch because of the global downturn, geopolitical risks and rising competition from China, said Klaus Rosenfeld, chief executive of Schaeffler, one of the world’s leading auto suppliers making everything from powertrains to bearings—and now an emerging player in the defense sector.

At the same time, recent regulatory changes in Germany and the European Union have improved capital-market access for defense companies, while huge government contracts and public financing schemes have unlocked nearly one trillion euros in defense funding, roughly $1.2 trillion, driven by fears of Russian expansionism and an ever more hostile global environment.

“A great trend in the German economy is that people are asking much more than before ‘how can we contribute to what has not been done over the last many years—to regain the ability to defend ourselves’—and this is what we are doing,” said Rosenfeld.

Rosenfeld’s firm is now making engines for drones, onboard systems for armored vehicles and components for military aviation. His aim is for 10% of the company’s turnover—currently €24 billion, equivalent to roughly $28 billion—to come from the defense division set up last year, with much of the output provided by its more than 100,000 total employees and 100 factories worldwide, including eight in the U.S.

“In Germany there is a lot of whining—if everyone just complains all the time that things are horrible then nothing will work. We must roll up our sleeves.”

Across Germany’s industrial belt, factory lines that once powered the country’s export miracle are being rewired into the machinery of Europe’s rearmament.

The government is on board. Berlin’s approach isn’t to revive the old economy, but to replace it. Idle factory floors and a growing pool of laid-off skilled workers are being redirected into the only sector still expanding at scale.

Volkswagen is in talks with Israeli companies with the aim to start producing components for Israel’s Iron Dome system by 2027. A swath of companies have added third shifts to churn out weapons and ammunition for Ukraine. Patriot interceptors, long a purely American product, are soon to be manufactured in Germany to meet surging demand.

Nearly 90% of European venture capital invested in defense technology is flowing into German companies, according to government figures.

“Europe must be able to defend itself [and] that also means building a strong security and defense industry we can depend on,” said Economy Minister Katherina Reiche.

Reiche, together with cabinet colleagues, including the defense minister, has been pushing to transform ailing manufacturing companies into defense contractors. “Repurposing existing production sites from other industries can reduce the hurdles to scaling up domestic capacity,” she said.

The economy ministry is now funding a matchmaking platform, set up by the main defense-industry trade association BDSV, to connect established defense supply chains with companies from other sectors.

The push by nondefense companies into the sector is helping alleviate the pressure on traditional supply chains to scale up, BDSV head Hans Christoph Atzpodien said.

Sebastian C. Schulte took over as chief executive at Deutz, the 162-year-old pioneer of the internal-combustion engine, around two weeks before Russia launched its full-scale invasion of Ukraine in 2022. Like many industrial peers, the company had been battered by Germany’s weakening economy and the war made matters worse.

“Transforming the company became my job,” Schulte said.

Coming from the marine defense industry, his instinct was to turn a crisis accelerated by war into opportunity. “Our USP is stable supply chains: What works for engines and mining equipment will work for the defense industry,” he said.

While traditional defense companies often have very long development cycles and take years to expand production, manufacturers steeled in the fiercely competitive automotive market are able to scale up quickly, he said.

Indeed, Lockheed Martin, the U.S. defense giant that makes missiles for the Patriot air-defense system, produces only about 620 interceptor missiles a year despite huge demand triggered by the wars involving Russia and Iran.

Deutz, a nimbler business used to the fast-shifting whims of car buyers, moved so quickly that it now supplies power-generation engines for Patriot systems used by Saudi Arabia, as well as various unmanned systems and armored vehicles.

The company acquired defense startups and invested in an entirely new business in which it had no prior experience. “We decided to put our money where our mouth is,” Schulte said.

The bet paid off: Unlike many automotive firms, the company has made no mass layoffs as workers shifted into defense production. The company grew 15% in revenue last year.

Foreign carmakers turn to Chinese technology to remain relevant

Western executives hope ‘in China for China’ strategy will halt sales decline in world’s largest car market

Western carmakers are fighting to stay relevant in the world’s largest car market with new electric vehicles made with Chinese technology that they also want to bring to other international markets. 

Two years after brands including Volkswagen and Toyota outlined plans to regain market share via cars made with local knowhow under an “in China for China” strategy, executives are hoping to win over consumers with a slew of new products displayed at the annual auto show in Beijing this week. 

“We want to stabilise this year but we assume that with all the models . . . we will be able to grow again in China,” said Jochen Goller, a board member at BMW.

The German group will showcase its electric iX3 sport-utility vehicle with an extended chassis, which was developed in China using local technologies from Momenta, Huawei and Alibaba. 

Foreign carmakers have significantly lost sales in China in recent years with the rise of domestic rivals and new players such as BYD, Geely and Xiaomi in a market where EVs and plug-in hybrids now account for more than half of new car sales.

Their share in China has halved to 32 per cent this year from 64 per cent in 2020, according to data from Shanghai consultancy Automobility.

After decades of Chinese brands learning car manufacturing from their western rivals through their local joint ventures, the tables have turned, forcing VW, Toyota and others to rely on Chinese partners and supply chains to build cars faster and with advanced software.

“We are so big in China, we can’t walk away,” VW’s brand sales chief Martin Sander said at an industry event in London last month. 

While Europe’s largest carmaker, which includes the Porsche and Audi brands, has long manufactured vehicles locally, it is also designing and developing its vehicles in China. “Because we just see what we’ve been doing in Europe for a long period of time is not competitive in the Chinese market,” Sander added. 

Following an overhaul in their strategies, early signs of improvement have emerged, although analysts warn that longer-term growth is far from assured.

“They're doing all the right things but . . . I am not confident that the products coming out will help the Europeans find the bottom,” said Tu Le, founder of consultancy Sino Auto Insights.

VW overtook Geely and BYD to reclaim the top position with a market share of 13 per cent in the first three months of 2026, Automobility data showed. This was mainly on the back of declining sales of EVs for domestic players as many Chinese government subsidies ended last year.

The German brand, whose vehicles are still predominantly powered by the combustion engine, plans to launch 13 plug-in hybrid and EV models in China alone this year.

“We are also looking into opportunities of bringing these vehicles into other parts of the world in order to face the competition,” Sander said. 

Audi fell victim to the broader softening EV demand. Last year, it launched the E5 Sportback, its China-only sub-brand without its signature four-ring logo. But it had to offer heavy discounts to the model, which was co-developed with its Chinese partner SAIC, early this year to bolster demand.

“We need some time to really ramp up the brand and the sales volume,” Audi chief executive Gernot Döllner said in an interview, adding that two models will follow the E5.

Following a $5bn writedown in late 2024, General Motors said its China business was now generating profits with hybrids and EVs accounting for more than half of its sales. But as it focuses on higher-margin models, its first-quarter sales in China have declined 21 per cent. 

Nissan will also aim to lift combined sales in China and exports from the country to 1mn units by 2030, up from 660,000 last year.

To do so, the Japanese group will collaborate further with its Chinese joint venture partner Dongfeng to bring the battery-powered N7 to Latin America and south-east Asia and the plug-in hybrid Frontier Pro pick-up truck to those two markets and the Gulf. 

“China becomes a global innovation and export hub,” said Guillaume Cartier, Nissan’s chief performance officer. 

Le said one risk was cannibalisation if lower-cost Chinese models eroded demand for vehicles produced elsewhere. But joint venture car plants in China operated by VW, Toyota and Nissan are also underutilised. “The alternative to not exporting is closing factories in China,” he warned.

Chris Liu, a Shanghai-based EV analyst with consultancy Omdia, said the real gap for foreign automakers in China was no longer hardware or even EV platforms, but software execution, and “that is fundamentally a talent problem”. 

“China offers a scale of software engineering talent that is difficult to replicate, both in volume and in iteration speed,” Liu said, adding that is the reason why German automakers in particular are deepening their research and development presence in China. 

“As long as foreign automakers can attract top software talent in China, they stay relevant. But staying competitive depends on whether they can actually operate at China’s development speed, not just participate in the talent market.”

Germany to begin privatisation of seized Gazprom division

Head of company now known as Sefe says capital increase could raise up to €2bn

The German division of Gazprom seized by Berlin in the wake of Russia’s 2022 assault on Ukraine is poised to take its first step towards privatisation, its chief executive has said.

The company, now known as Sefe, intends to raise €1.5bn-€2bn through a capital increase, Egbert Laege told the FT, and will use the funds to expand the side of the business that runs infrastructure assets.

Sefe, short for Securing Energy for Europe and formerly called Gazprom Germania, includes assets such as gas storage and pipelines as well as a UK-based trading business previously known as Gazprom Marketing & Trading.

This will be the first dilution of the German government’s 100 per cent shareholding in the company. According to EU Commission rules, it must sell off at least 75 per cent of its stake by the end of 2028.

Laege said the Iran war had given added impetus to the group’s privatisation plans, as restricted flows from the Middle East highlighted the importance of reliable suppliers. It has also driven gas prices higher.

The company’s history as a vehicle for Germany to manage its energy security could exclude some investor candidates.

“We are discussing with the government on whether it has preferences or restrictions, given that we are at a very crucial point for the security of supply for Europe and Germany,” said Laege.

Once it has completed its initial capital increase, the government will dilute more of its shares in another process that could take the form of another sell-off, an initial public offering or something else, according to Laege.

“Given the short time in which we’re operating, maybe the IPO is a bit difficult for us but in the end this is up to the markets and it’s a decision for the government,” he said.

Some industry observers have speculated that the company’s assets might be split and sold off. However, Sefe intends to keep the two “engines” of the business — its regulated assets and trading operations — together as they complement one another, according to Laege.

Others have suggested Germany may merge Sefe with gas importer Uniper, which was also nationalised in 2022 when it almost collapsed after Russia cut its exports of the fuel to Europe.

“The government has been looking at this,” Laege said. “It owns both companies so it should of course look at whether a combination would create more value, but currently I’m working under the assumption that the process for Sefe will be standalone.”

Huge sums being invested in European rearmament are attracting fraudsters, says agency head Petr Klement

The new director of the EU’s anti-fraud agency has warned that European capitals’ rearmament drive is a “magnet” for criminals who are attracted by the historic sums being poured into the defence sector.

The anti-fraud watchdog Olaf has received a rising number of tip-offs regarding “wrongdoing in the defence area, especially in research projects or procurement”, it stated in its yearly report published today.

“If we invest more into defence, you will see more fraud or more cases in defence,” Petr Klement, who took over as Olaf’s director in February, told the FT.

“The magnet for the fraudsters, the magnet for the criminals . . . is the money itself,” he added.

Olaf investigates fraud and irregularities related to the EU’s common budget, which member states have been using to finance a growing number of defence projects, particularly since Russia’s full-scale invasion of Ukraine. These include a €500mn programme to fund ammunition, €150bn in EU-backed defence loans and a €1.5bn defence industry programme.

“Since this is money of the European citizens, and since Olaf is tasked to . . . protect the financial interests, we are strongly dedicated and we are on guard,” Klement said, adding that this also concerned the EU’s upcoming €2tn budget, which is currently being negotiated.

Based on its findings, the agency makes recommendations to member states and EU agencies to recover funds linked to fraud.

Last year, Olaf told member states and EU institutions to recoup €597mn lost as a result of fraud or other wrongdoings, and to prevent €18.1mn from being spent in the first place. Over the past decade, Olaf’s probes have led to the recovery of €6.8bn, according to its report.

Klement declined to comment on specific defence-related cases, but said that issues in the sector included “manipulation with public tenders, blown-up prices, clientelism [and] corruption”.

He said cases were likely to crop up in countries “with a weaker system of controls . . . this is not shaming certain countries or segments. This is simply how it’s been working for decades”.

“The opportunity to steal money attracts those who want to steal,” Klement added.

Klement, who is Czech and previously acted as deputy chief prosecutor at the European Public Prosecutor’s Office (EPPO), said it was one of his “top priorities” to seek closer co-operation between Olaf and EPPO, staging more joint investigations and sharing information.

While Olaf conducts investigations, it is up to authorities in the member states or EPPO to initiate judicial proceedings based on Olaf’s findings, a loophole that has led to some countries such as Hungary not properly following up on the agency’s probes.

Hungary recovered and handed over less than a fifth of the funds flagged by Olaf for potential fraud between 2015 and 2024, according to data from the agency.

But the election of Péter Magyar, who unseated longtime premier Viktor Orbán a week ago, could herald changes as Magyar has announced that Hungary would join EPPO.

“I find it very positive, Hungary’s joining EPPO,” Klement said, adding that this would “definitely” aid in the fight against fraud, for instance through better exchanges of information or following up on Olaf’s recommendations.

“It’s a very rational and very good step forward.”

Deal for Kelonia Therapeutics could come as soon as Monday

Eli Lilly LLY 2.55%increase; green up pointing triangle is in advanced talks to acquire Kelonia Therapeutics for more than $2 billion, according to people familiar with the matter.

A deal could come as soon as Monday, assuming the talks don’t fall apart, the people said. The deal price could also include additional consideration if Kelonia reaches certain milestones, they said.

Privately held Kelonia is developing a next-generation treatment for the blood cancer multiple myeloma. Buying it would position Eli Lilly to boost its position in the lucrative blood-cancer segment of the $240 billion global cancer-drug market.

Kelonia has raised just under $60 million to date, with its last public valuation being a little over $100 million as of April 2022, according to data from PitchBook.

Kelonia is developing a next-generation so-called CAR-T therapy. CAR-T therapies deliver genes—or genetically altered cells—to help a patient’s immune system fight the cancer.

“We have something that is truly transformative to the space,” Kelonia Chief Executive Kevin Friedman said in an interview in January at an industry conference.

Patients usually have to undergo chemotherapy before they can get treatment. They also have to have their immune cells harvested. The cells are then sent to a lab, which reprograms them to attack the cancer before sending them back to be returned to the patient.

Kelonia’s technology promises to work without requiring patients to undergo chemotherapy or the bespoke manufacturing process that turns immune cells into cancer fighters.

The company’s multiple-myeloma treatment is still early in development. In January, Kelonia said the Food and Drug Administration had greenlighted early stage, or Phase 1, testing of the experimental treatment’s safety in up to 40 volunteers.

Cancer drugs are an important part of Lilly’s portfolio, accounting for $9.4 billion of the company’s $65.2 billion total revenue last year. It already has one blood-cancer drug, Jaypirca.

If Kelonia’s technology pans out, it would help Lilly add to its blood-cancer lineup and bolster its next-generation cancer offerings, and keep the company from having to depend too heavily on its anti-obesity and diabetes lineup.

Eli Lilly is flush with cash from sales of its weight-loss drugs and has been on a dealmaking spree. Last month, it struck a deal to buy Centessa Pharmaceuticals for an initial payment of about $6.3 billion to expand its neuroscience portfolio and capabilities into sleep medicine.

In February, Eli Lilly agreed to buy genetic-medicine biotechnology company Orna Therapeutics for up to $2.4 billion and in January said it would shell out about $1.2 billion for biotech Ventyx Biosciences and its pipeline of immune and neurodegenerative disease drugs.

Emirati officials speak with Treasury Secretary Scott Bessent about accessing dollars if Middle East conflict drags on

WASHINGTON—The United Arab Emirates has opened talks with the U.S. about obtaining a financial backstop in case the Iran war plunges the oil-rich Persian Gulf state into a deeper crisis, U.S. officials said.

U.A.E. Central Bank Governor Khaled Mohamed Balama raised the idea of a currency-swap line with Treasury Secretary Scott Bessent and Treasury and Federal Reserve officials in meetings in Washington last week, the officials said. The Emiratis emphasized that they had so far avoided the worst economic effects of the conflict but might still need a financial lifeline, the officials said.

The talks highlighted the U.A.E.’s concern that the war could inflict major damage on its economy and its position as a global financial hub, depleting its foreign reserves and scaring away investors who once saw it as a stable and secure place for their money. The conflict has damaged Emirati oil-and-gas infrastructure and shut off their ability to sell oil using tankers transiting the Strait of Hormuz, depriving it of a key source of dollar revenues.

Emirati officials haven’t made a formal request for a swap line, which would give the U.A.E. central bank inexpensive access to dollars to support its currency or shore up its foreign reserves in case of a liquidity crisis. In talks with the U.S. in recent days, they have portrayed the proposal as preliminary and precautionary, the U.S. officials said.

But they have also argued that it was President Trump’s decision to attack Iran that entangled their country in a destructive conflict whose effects may not be over, some of the officials said. Emirati officials told the U.S. officials that if the U.A.E runs short of dollars, it may be forced to use Chinese yuan or other countries’ currencies for oil sales and other transactions, some of the officials said.

In that scenario is an implicit threat to the U.S. dollar, which reigns supreme among global currencies partially because of its near-exclusive use in oil transactions.

The U.A.E Central Bank didn’t respond to requests for comment.

Swap lines are typically administered by the Fed, but its 12-person policy committee, the Federal Open Market Committee, is unlikely to approve one for U.A.E., some of the officials said.

It usually reserves them for relieving severe funding-market pressures that could spill back into the U.S. economy. It has standing arrangements with central banks in the U.K., Canada, Japan, Switzerland, and the European Union. During periods of acute stress, most recently in 2020, it extended swap lines to nine other central banks, including in Mexico, South Korea and Brazil. The U.A.E. has fewer ties to U.S. markets than traditional swap recipients.

The Treasury Department has recently provided alternative swap arrangements without the Fed. The department signed off on a $20 billion swap for Argentina through the Exchange Stabilization Fund last year.

Before a cease-fire took effect on April 17, Iran targeted the U.A.E especially hard, firing over 2,800 drones and missiles, according to the U.A.E.’s Ministry of Defense, although most were shot down.

The Emirati dirham is pegged to the dollar and backed by foreign-currency reserves of $270 billion, but the war has put it under pressures from capital-flight risks, stock-market volatility and other disruptions, analysts said.

The credit-rating firm S&P Global said in a March 6 report that the U.A.E’s “substantial fiscal, economic, external, and policy flexibility will act as an effective buffer” against the war’s economic effects. But it warned that “the potential for prolonged disruption” to its oil exports and damage to infrastructure “add clear risk to our expectations.”

The U.A.E. has threatened to freeze billions of dollars of Iranian assets held in the Gulf state, The Wall Street Journal has reported, a move that could sever one of Tehran’s most important economic lifelines. But such a move would also upend lucrative trade and banking ties with Tehran and damage the U.A.E.’s ability to attract and retain capital from other politically charged sources, such as Russia.

The war also has driven the Emiratis closer to the U.S. and, at least for now, to abandon the notion that forging diplomatic and financial ties to Iran would help insulate it from the region’s conflicts.

Treasury officials invited Gulf countries on the sidelines of the IMF and World Bank meetings in Washington last week to outline their needs for repairing infrastructure and rebuilding their economies, promising to put them at the front of the line if assistance is needed.

The Fed used swap lines heavily used during the 2008 financial crisis, buying the currency of other borrowing central banks with dollars and later selling it back. It also used swap lines to support foreign central banks after the start of the Covid-19 pandemic.

Countries that don’t have a swap line with the Fed can still exchange their holdings of Treasury bonds for dollars through a program administered by the New York Fed.

Gulf countries have also raised billions of dollars in debt from investors over the past week, highlighting their push to have cash on hand as they face what the International Energy Agency has called “the most severe oil-supply shock in history.”

Abu Dhabi, the U.A.E.’s capital and the richest of the seven emirates that make up the country, raised around $4 billion from investors in private-placement transactions arranged by banks including Goldman Sachs earlier this month, people familiar with the matter said. The emirate borrowed at a premium to avoid a drawn-out fundraising process, they said.

Bahrain also set up a roughly $5 billion swap line with the U.A.E. earlier this month to help improve financial stability, the countries’ central banks said.

Finance ministers and central bankers in Washington for the IMF and World Bank meetings said they didn’t expect an easy or swift recovery for the region.

“The basic logistics of scheduling tankers and bringing them back after the chaos we have seen, that will take possibly to the end of June,” said Mohammed Al-Jadaan, Saudi Arabia’s finance minister, during a panel on Thursday. “Anyone who’s counting for a quick recovery, even if there is a total end of hostilities, will need to recalculate that.”

Blue Origin Rocket Stumbles on First Commercial Mission

Jeff Bezos’ rocket company said a satellite from customer AST SpaceMobile was deployed into an incorrect orbit

Blue Origin’s first commercial launch for its massive new rocket suffered a mission hiccup Sunday, a setback for Jeff Bezos’ rocket company.

The launch of the company’s New Glenn rocket started smoothly, with the vehicle shooting into the sky from the Blue Origin launch site in the Cape Canaveral, Fla., area. During the flight, New Glenn’s third ever, the vehicle’s huge booster returned safely to Earth, a feat only Blue Origin and Elon Musk’s SpaceX have achieved with orbital rockets.

But the mission later suffered a mishap. A satellite the rocket was carrying into orbit for AST SpaceMobile ASTS -5.95%decrease; red down pointing triangle, a company building a cellular broadband network in space, wasn’t deployed correctly.

In a post on X, Blue Origin said its rocket delivered AST’s satellite into an incorrect location in space: “The payload was placed into an off-nominal orbit,” the company said, adding that teams were assessing what happened.

AST said the satellite’s altitude was too low to sustain operations and that it will be taken out of orbit. The cost is expected to be covered under its insurance policy and the company said it expects an orbital launch every month or two this year.

The stumble comes as Blue Origin works to ramp up flights with New Glenn to address a backlog of flights, and better challenge SpaceX’s command position in the launch market. The setback Sunday is a reminder of the difficulty rocket companies often face as they attempt to more regularly fly complex, expensive machines.

United Launch Alliance, the rocket operator owned by Boeing and Lockheed Martin, has dealt with its own struggles with a new rocket, called Vulcan Centaur. SpaceX’s Starship vehicle has had its fits and starts during flight tests last year.

Texas-based AST invited shareholders to watch the New Glenn launch live. AST said before the launch that its satellite, called BlueBird 7, would be the largest communications array ever deployed in low-Earth orbit.

Wave of inflation will persist as higher fuel prices feed through into businesses

Donald Trump’s war in Iran has unleashed a torrent of inflation in the US that economists warn will linger long after the conflict ends, squeezing Americans ahead of November’s midterm elections. 

The impact of the conflict has reverberated across the world’s biggest economy since its outbreak in late February and experts say that the inflationary shock will take time to recede.

“We were on a very good trajectory of inflation going down. Now there is somewhat [of a] reversal,” Kristalina Georgieva, managing director of the IMF, told the FT. “What we see is that short-term inflation expectations have moved up here in the United States.”

Across the world, she said, the fallout from the conflict would not “evaporate overnight even if the war ends tomorrow”.

Iran’s closure of the Strait of Hormuz in response to the US and Israel’s bombing campaign has triggered global fuel shortages and sent prices soaring. Brent crude, the global benchmark, jumped from around $70 a barrel when the conflict began to more than $110 a barrel at its height. 

Tehran’s announcement on Friday that the strait, through which a fifth of global oil supply typically transits, would be opened for the duration of a tentative ceasefire, caused crude prices to drop more than 10 per cent to below $90/barrel. But on Saturday it said the Strait will not fully reopen and remains under Tehran’s “strict control”.

Even if the truce endures, the war will leave a lasting impact on economies across the world. 

US inflation jumped to 3.3 per cent in March, its highest level in two years as measured by the Bureau of Labor Statistics consumer price index, driven in large part by a jump in petrol prices.

The IMF estimates US inflation of 3.2 per cent for 2026, up from a forecast of 2.5 per cent before the war broke out. The OECD has increased its forecasts from 2.8 per cent to 4.2 per cent. 

“By the end of the year, prices will be notably higher than they would have otherwise been,” said Joseph Gagnon, senior fellow at the Peterson Institute for International Economics.

“[Inflation] is going to gradually unwind, but it’s not going to fully unwind even by December — it’s going to be in some noticeable amount higher than it was in January.”

The initial burst of consumer inflation has been driven by prices at the pump. Petrol prices have surged from $2.98/gallon when the conflict began to $4.08 on Friday, according to the AAA motoring group. 

But second-order effects, as the price of fuel feeds through into other areas of the economy, have yet to be fully felt. 

“The risk is that the longer the conflict drags on and energy prices remain high, the more likely it is that these elevated prices will bleed into other prices, as businesses incorporate costly energy input costs in setting their prices,” said Christopher Waller, a Federal Reserve governor on Friday. 

Diesel — which is a key input in everything from agriculture to trucking — has jumped from $3.76 to $5.59 a gallon since the conflict erupted. That leaves it close to the $5.82 record it hit in 2022 in the wake of Russia’s full-scale invasion of Ukraine. 

Already many Americans are feeling the pinch. Larry Smith, a 72-year-old retiree living near Sealy, a town west of Houston, Texas, said he felt the impact of rising prices as soon as diesel started getting more expensive. 

“This country still runs on diesel, when diesel goes up you start the ball rolling on everything,” said Smith, sitting in his blue Chevrolet pick-up. Stickers supporting the US military decorated his rear sliding window. “I’m an old jarhead, I’m not really impressed the way things are going.”

“We’re cutting back on a lot of things,” said his partner Delores Smith, a 65-year-old Walmart clerk, sitting in the passenger seat. “That’s why so many people are going back to work,” she said, explaining that many of her retired friends have had to take jobs again to make ends meet.

The University of Michigan’s consumer sentiment index fell to a record low in April amid gloom over rising prices. Its index of inflation expectations showed Americans anticipated prices rising 4.8 per cent over the next year, up from 3.8 per cent a month ago.

A doubling in jet fuel prices has pushed up costs for airlines, prompting them to raise ticket prices.

Nitrogen fertiliser costs, which have risen more than 30 per cent since the conflict erupted, according to the American Farm Bureau Federation, are expected to pass through to grocery costs later in the year.

As trucking costs rise, consumer executives have warned of potential price increases in the months ahead. “Our assumption is that inflation will come,” said PepsiCo chief financial officer Steve Schmitt this week.

Stew Leonard Jr, chief executive of the Stew Leonard’s grocery chain, said the rapid rise in diesel prices since the war began had made supplying its eight stores in the New York metropolitan area more expensive. 

“Fuel touches every part of the food business,” Leonard told the FT. “We were spending $5,000 to get a tractor-trailer up here from Florida with all of our fruits and vegetables on it. Now it’s $7,000.” 

He said that after years of relentless inflation, he and fellow leaders of the family-run company had decided to “eat” the costs for now. “It’s not great for our already thin margins in the supermarket business.”

Core inflation, which strips out volatile food and energy prices, edged up to 2.6 per cent in March versus the previous year, but economists expect it to gradually climb in the coming months as the effects of higher fuel prices feed through to other parts of the economy. 

While the rise will be slower to take hold and smaller in magnitude than the surge in headline inflation, economists warned it would be “stickier” and take much longer to dissipate. 

For Trump, who ran for office on a platform of combating inflation, lingering high prices pose a political threat. The president’s popularity has already been undermined by a stubborn affordability crisis that now threatens to undermine Republicans in this year’s midterm elections. 

Damone Godbolt, a 37-year-old Walmart truck driver shopping in Sealy, bemoaned the rising prices as he criticised the president for intervening in the Middle East. “We should not be over there, it’s pointless to meddle in it.”

“We’re a family of seven, we feel it a lot,” he said of the higher prices. “We try and be more mindful with bills going up, we’re sacrificing some things, some of the luxury snacks, now we’re just getting the necessities.”

White House spokesman Kush Desai said: “While President Trump was always clear about temporary disruptions as a result of Operation Epic Fury, the Administration has never lost focus on implementing the President’s affordability agenda on the home front”. 

He added that the White House’s “supply-side policies of deregulation, energy abundance, and tax cuts continue to cool inflation in the long term” and that “as energy markets stabilise with the reopening of the Strait of Hormuz, overall inflation should follow suit”. 

The president this week dispatched some of his top lieutenants to take steps to tackle fuel costs.

Doug Burgum and Chris Wright, secretaries of the interior and energy, held a call with oil executives on Thursday urging them to increase production. Treasury secretary Scott Bessent, meanwhile, warned fuel retailers that the administration expected them to quickly slash prices as crude declines. 

“We are going to be watching the gas stations, because they raised prices very quickly when the crude oil prices went up. We hope they will bring them down just as quickly as crude oil prices have come down,” he said.

Poorer Americans stand to be disproportionately hit by the inflationary shock, as they spend a higher proportion of their income on fuel.

“Wealthier people will spend more on energy too,” said Gagnon. “But if you’re poor, you really need to put gas in your car and heat your house and that looms large in your spending, so relatively speaking you are hit more.

In Sealy, Teresa Cano, a 50-year-old homemaker, said everything already feels more expensive.

“We used to buy three to four cases of water and now we buy one to two for twice the price,” she said. “We’re buying cheaper things instead of from regular brands.”

“The cashier just paid for the eggs,” she said. “I had $132, I said leave the eggs, she said let me pay.”