The Third Coming: The war in Iran could drown the world in inflation
Recently, the global economy has been suffering one damage from "external causes" after another. The pandemic, the mutual sanctions due to their own, the duties of Donald Trump, and now the campaign of Israel and the United States against Iran. The main consequence may be a new round of inflation, which for some economies will turn into stagflation or even a direct economic recession. Why many countries risk losing control over prices, and why there are few tools in their central banks to counter such a scenario, is described in the Izvestia article.
The largest artery
About 20% of the world's oil supplies pass through the Strait of Hormuz every day. The experience of previous crises and the calculations of economists show a strict proportion: the loss of 1% of global supply translates into an increase in commodity prices by about 4%. In an environment where the threat of using cheap drones is enough to block shipping, no naval escorts (an idea proposed by Trump) are capable of returning the cost of freight and insurance to pre-war levels. According to the harsh scenario of the Bloomberg macroeconomic model, a prolonged closure of the strait can throw quotes to around $108 per barrel and keep them there until the end of the year.
Expensive fuel is a kind of regressive tax that takes liquidity out of the pockets of consumers and the corporate sector, redistributing it in favor of exporting countries, with the exception of the Persian Gulf countries (however, there are nuances: not all regional oil moves through the Strait of Hormuz, as there are oil pipelines through Saudi Arabia). Moreover, the mass market suffers the most: rich people and the upper middle class are much better protected from inflation due to a different spending structure.
Monetary impasse
For the world's central banks, the oil rally poses a problem in the nature of current inflation, which remains high by pre-pandemic standards. The instruments of the US Federal Reserve System (FRS), the European Central Bank (ECB), the Bank of England and the Bank of Japan are focused on demand management. By increasing the interest rate, they make loans expensive, cooling purchasing activity. However, this approach is not capable of increasing the throughput capacity of the Strait of Hormuz, extinguishing fires at refineries or producing additional barrels of oil.
The introduction of oil at $108 per barrel into macroeconomic models means that core inflation (that is, inflation already minus fuel and food) in the United States will receive an impulse to increase by 0.8% by the end of the year, breaking through the 3% mark. This is bad news for the Fed. Inflationary expectations of businesses and the population, which have been so difficult to stabilize after the pandemic surge, are at risk of falling off the anchor. If employees start demanding wage indexation because of expensive gasoline, and businesses shift these costs to the prices of goods, an inflationary spiral will start.
Monetary authorities are caught between two fires. Classical economic theory requires raising interest rates in response to an inflationary shock. But to do this means to finish off economic growth, which is already suffering from trade wars.
In the United States, the situation is complicated by strong political pressure. American leader Donald Trump categorically demands that the Fed ease policy. Kevin Warsh, the likely future head of the Federal Reserve, will find himself in the epicenter of conflict: economic reality dictates the need to keep rates high, and the political expediency of the Oval Office requires cheap money.
Europe's problems
If for the United States, with its powerful shale sector, the oil shock is an inflation problem, but not a GDP problem (oil workers' incomes partially compensate for consumer losses), then the situation looks much more serious for Europe, since the EU lacks a domestic resource base.
The impact on the European economy is twofold — the gas crisis has been added to the oil crisis. On March 4, 2026, Qatar— one of the key pillars of EU gas security after rejecting Russian pipeline supplies, announced the suspension of its liquefied natural gas (LNG) terminals for at least a week due to regional risks. Even if the decision is extended on time, capacity start-up will take several more weeks.
This is a very unpleasant signal for the energy-intensive European industry. The gas market, unlike the oil market, is less flexible in logistics. The loss of Qatari volumes cannot be immediately replaced by American LNG, which is already trading at historic highs due to domestic demand in the United States. Adding to this equation is the fact that due to the cold winter and the reduction in Russian supplies, gas reserves in underground gas storage facilities are at their lowest in several years. And Russia is considering stopping energy supplies to the European Union before the embargo begins in 2027.
The simulation shows that European GDP will lose at least 0.6% of growth, while the UK will lose 0.5%. At the same time, inflation in these jurisdictions will receive a strong boost of +1.1%. The ECB, under the leadership of outgoing Christine Lagarde, will have to forget about plans to stimulate the economy. Expensive oil and gas can destroy the remnants of the competitiveness of the German and French industries. Stagflation and a decline in production, while prices rise, are becoming the baseline scenario for Europe in 2026.
Forward to the past
Current events are compared with the classic crises of 1973 (the Arab embargo) and 1979 (the Islamic Revolution in Iran). Back then, energy shocks led to double-digit inflation in developed countries, forcing Fed Chairman Paul Volcker to raise the discount rate, triggering unemployment of 11% and a deep recession. To be fair, the modern economy has a large margin of safety. The share of the energy-intensive industry in the US GDP structure has significantly decreased, giving way to the service sector. The geography of production is diversified, and the share of renewable energy sources has become a significant balance factor. Therefore, an exact repeat of the disaster of the 70s is unlikely.
The situation is more complicated for Europe, as its economy is already going through difficult times, and flagships are still focused on heavy industry as an economic locomotive. Not to mention the secondary consequences like falling demand for cars due to expensive fuel. Here, the surge in inflation may be exacerbated by a new economic downturn, which is unlikely to be stopped by rising military spending in Germany and a number of other countries.
The laws of macroeconomics cannot be abolished — the artificial withdrawal of cheap energy from global circulation means a forced slowdown in global growth. The longer the drone and missile exchanges continue in the Persian Gulf region, the tougher the landing will be for Western consumers and manufacturers. Central banks don't have a lot of cards in this game: they can manage the value of money, but they are powerless in the face of a physical shortage of hydrocarbons. The only thing that can fix the situation in the near future is to quickly end the conflict and find a peaceful solution to the problem. But Washington and Jerusalem are clearly not ready for this yet.
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