Just as inflation appeared to be fading into the background, the Middle East has reignited it. The U.S.-Israeli strikes on Iran and Tehran's retaliation have sent energy markets into a tailspin. The question now is not whether prices will rise, but by how much and for how long.
The Strait That Holds the World Hostage
Israeli and U.S. strikes on Iran, combined with retaliation by Tehran, forced shutdowns of oil and gas facilities across the Middle East and disrupted shipping through the crucial Strait of Hormuz. That waterway is not just a geographic chokepoint. It is an economic one. The Strait carries roughly one in five barrels of the global oil supply. A sustained disruption could push Brent crude toward $100 per barrel.
Brent crude futures rose as much as 13% to $82.37 a barrel, their highest since January 2025. Markets responded fast. The signal was clear: this conflict matters.
Inflation's Unwelcome Return
The timing could hardly be worse. Just as President Donald Trump had been insisting that inflation is on the run, the war involving Iran threatens another price spike that could undermine his central case for lower interest rates.
January's producer price index rose a stronger-than-expected 0.8% excluding food and energy, pushing the 12-month rate to 3.6%, well above the Federal Reserve's 2% target. This was before oil jumped. Add an energy shock on top, and the math gets uncomfortable quickly.
A one-year persistent shock to oil and gas prices could push inflation up by 0.7 percentage points and dampen output growth by 0.2% in 2026. This is the kind of stagflationary mix that central banks dread most.
Central Banks Caught in the Middle
Rate cuts are now looking increasingly unlikely. Former Treasury Secretary Janet Yellen warned that the conflict could hit U.S. economic growth and fuel inflationary pressures, keeping the Federal Reserve from cutting rates.
The European Central Bank faces a genuine dilemma. Services inflation remains sticky. An oil shock would push headline inflation higher, yet the growth outlook is simultaneously deteriorating under the combined weight of tariffs, uncertainty, and rising energy costs. There is no clean policy response available.
The Worst Possible Moment
The combination of higher energy costs, disrupted logistics, and a broad confidence shock would constitute a meaningful drag on global trade volumes at precisely the moment the world economy was still digesting the inflationary and growth consequences of the tariff shock. Analysts at ING called it plainly: the mother of all bad timings.
Some economists now warn of stagflation risks, where higher prices coincide with slower growth, especially given that most regions are still recovering from the pandemic, trade, and geopolitical tensions.
The optimists argue that this resolves quickly and markets normalize. The pessimists point to 1973. History suggests the difference between those two outcomes comes down to one thing: how long the Strait stays disrupted. Right now, nobody knows the answer.
