As Trump declares inflation tamed, Iran conflict threatens new price pressures
Gas prices at the Sunoco gas station in Media, Pennsylvania, USA on Monday, March 2, 2026. Oil rose by the most in four years as the first effects of war in the Middle East began to be felt, traffic in the Strait of Hormuz almost stopped and disruption at a major refinery in Saudi Arabia underlined the threat to supplies in one of the world’s biggest producing regions. Photographer: Matthew Hatcher/Bloomberg via Getty Images
Matthew Hatcher | Bloomberg | Getty Images
Just as President Donald Trump insists inflation is running out, the war involving Iran threatens another price hike that could undermine his main argument for lower interest rates.
Oil prices rose overnight as markets reacted to tensions in the region following a joint US-Israeli attack. West Texas Intermediate Futures rose more than 5 percent Brent crude futures Both gained about 6% from overnight highs but were still up sharply.
The rise in oil prices adds another layer to recent indications that underlying price pressures remain, although inflation remains well off the highs of a few years ago. Historically, increases in energy costs have generally preceded broader increases in inflation.
Generally speaking, “war has proven to be ‘inflationary’ as it is associated with negative supply shocks,” wrote Thierry Wizman, global foreign exchange and rates strategist at Macquarie Group. “In fact, even before the new US-Iran war, oil prices were high due to hoarding, and since the hostilities began, prices have been rising due to high insurance premiums and forced rerouting of shipping.”
There are signs that inflation pressures may strengthen outside the energy markets.
January’s producer price index, a measure of wholesale costs and an indicator of pipeline inflation, rose more strongly than expected at 0.8%, excluding food and energy. This pushed the 12-month interest rate to 3.6%; This is still well above the Federal Reserve’s 2% target.
Additionally, the Institute for Supply Management reported on Monday: manufacturing price index showed that more than 70% of managers reported higher prices in February; This means an increase of 11.5 points compared to the previous month.
Even so, most economists say the impact of higher oil prices is difficult to measure and may ultimately be temporary, as has often been the case in past Middle East conflicts.
Time is the key
“It is currently unclear whether the price increase will be sustainable in the medium term because the conflict is still in its early stages,” said Ravikanth Rai, deputy general manager of energy and natural resources at Morningstar. “It is difficult to determine whether there will be a structural impact on oil and gas supplies from the region.”
Moreover, with the United States producing a larger share of its own energy, the broader economic impact of oil price increases is not what it used to be.
“In today’s American economy, sudden increases in oil prices do not present the same significant downside risk to economic growth or inflation as they did half a century ago,” said Joseph Brusuelas, chief economist at RSM. “The American economy has tripled in overall size while being much less exposed to economic and inflationary disruptions.”
According to one estimate, a $10 increase in oil prices would lead to a roughly 0.2 percentage point increase in inflation and a 0.1 percentage point decrease in economic growth. With the current movement in crude oil falling below this threshold, the short-term economic impact is expected to be moderate.
Stagflation risk is back
Yet crosscurrents continue. USA While there are signs of softening in the labor market, the outlook for tariffs and fiscal policy remains uncertain; This contributes to an economic outlook that remains resilient but shows signs of cooling towards the end of 2025.
Some economists warn of the risks of stagflation, where high prices coincide with slow growth.
“Given that growth in most regions is still recovering from the pandemic, trade and geopolitical tensions, stagflation risks may re-emerge depending on how long Middle East tensions last,” said İpek Özkardeskaya, senior analyst at Swissquote.
The developments suggest that inflation may face renewed pressure from both geopolitical shocks and underlying cost trends, complicating a gradual return to the Fed’s 2% target.
markets on monday increasing bets He said the central bank will hold its meeting in March and possibly on hold until the summer as officials weigh competing forces such as high energy prices and uneven growth.
“This conflict plays out against a backdrop of a positive growth policy mix and resilient earnings, while increasing stagflationary risks for the global economy,” said Emmanuel Cau, head of European equity strategy at Barclays.
Cau added that if the conflict ultimately leads to greater regional stability, it could even be “oil negative/growth positive in the medium term.”
All of this means “a rise in oil prices will of course attract the Fed’s attention,” wrote Citigroup economist Andrew Hollenhorst. “But movements in commodity prices, especially if they are short-lived, are often ‘scrutinized’ by Fed officials and may be moderate anyway.”
