Fears of 1970s-style stagflation arise with oil spike to $100. How big a threat is it?
A driver refuels a vehicle at a Wawa gas station on Monday, March 2, 2026 in Media, Pennsylvania, United States.
Matthew Hatcher | Bloomberg | Getty Images
With oil rising to $100 a barrel and the job market essentially paralyzed, the threat of stagflation looms over the U.S. economy and financial markets again.
High inflation and slow growth pose a double threat, as stimulus measures such as lowering interest rates and government spending make inflation worse. Persistently high prices could harm both the labor market and consumer spending, which drives more than two-thirds of the U.S. economic engine.
“I’ve long been concerned about the threat of stagflation, in part because there are so many different inflationary pressures on the economy,” said Erik Norland, chief economist at CME Group. he said. “You have huge budget deficits, inflation is above target, and central banks are already easing policy. And then you add oil at $100 a barrel.”
Markets were shaken again on Monday over the possibility of prolonged conflict in the Middle East. Earlier in the session, U.S. crude oil rose above $100 a barrel for the first time since 2022, but prices retreated by the afternoon.
crude prices
The rise in energy costs comes just days after the Bureau of Labor Statistics reported that the economy lost 92,000 jobs in February and the unemployment rate rose to 4.4%. The weak job numbers follow a pattern of stagnant job growth that began in early 2025, raising fresh fears that the mood is gone from a strong growth spurt for much of last year. Total job growth for all of 2025 (116,000) was 5,000 fewer than the previous year’s monthly average.
At the same time, core inflation, as measured by the Federal Reserve’s preferred gauge, was last at 3%, a full point above the central bank’s target.
Return to stagflation
The economy last saw a jolt of oil-induced stagflation following Russia’s invasion of Ukraine in 2022, but even then it was nothing like the severe pattern of the 1970s. Similar fears resurfaced when the Trump administration raised taxes Aggressive tariffs in April 2025.
Of course, numerous stagflation threats have emerged over the years, most of which have not materialized as the economy stabilized.
For most economists and Wall Street strategists, the primary factor this time is duration. If the situation in Iran can be resolved within a few weeks, as President Donald Trump has promised, any stagflation shock will likely be muted. Oil futures are pointing to lower prices throughout the year, but this can be an unreliable guide to which direction prices will ultimately go.
“Higher oil prices, higher inflation are causing a shock,” said Jim Caron, chief investment officer of portfolio solutions at Morgan Stanley Investment Management. “But if oil prices stay high long enough, then it becomes a growth scare, and then bond yields start to fall. If bond yields are falling because people are worried about growth, then you’re in stagflation mode.”
The fact that bond yields rose mostly during the Iran crisis suggests that investors are pricing in fears of inflation resulting from the rise in oil prices.
Similarly, markets are holding back expectations for a Fed rate cut and believe the central bank will focus on maintaining its 2% inflation target rather than supporting the labor market, where both hiring and firing rates are low.
“The U.S. economy and stock market are stuck between Iran and a hard place right now. So is the Fed,” wrote market veteran Ed Yardeni, founder of Yardeni Research. “If the oil shock persists, the Fed’s dual mandate will be caught between the increasing risk of high inflation and rising unemployment.”
Yardeni said the Iran war raises the likelihood of stagflation like the 1970s to 35 percent because it is “the last stress test of the resilience of the U.S. economy since the beginning of the decade.”
Most economists think the pass-through cost of increased oil to the rest of the economy is minimal. However, Yardeni stated that increasing fuel prices due to the use of oil in fertilizer production poses a danger of increasing food inflation.
Fed’s reaction
Fed officials, on their part, Look for such spins when formulating policy. But expanded pressures could influence policy.
Before the US-Israeli attack on Iran, futures traders were pricing in the Fed’s next interest rate cut in June, with at least one more rate cut before the end of the year. This first cut has now been postponed to September – July at the earliest and there will be no second cut in 2026. As of year-end, the implied federal funds rate increased from the current 3.64% to 3.21%.
“This is probably the worst-case scenario for monetary policy, and we will likely hear the term stagflation repeated once again, along with the ‘Iran crisis,’” Eugenio Aleman, chief economist at Raymond James, wrote. “We don’t think this new scenario will cause Fed officials to change their minds on monetary policy for now and wait to get more data on the risks of their dual mandate between inflation and employment.”
Indeed, other economic signals other than the labor market are quite strong.
Atlanta Fed is following second quarter GDP growth 2.1% – a significant decrease from the previous three quarters but still quite strong. Reports last week showed that both the manufacturing and services sectors expanded in February; retail sales figures fell 0.2%.
“While $100 a barrel of oil would be uncomfortable for stocks, inflation, the stock market, and the earnings picture are all better now than they were in March 2022, the last time oil prices surpassed $100 following the Russian invasion of Ukraine,” Carol Schleif, chief market strategist at BMO Private Wealth, said in a note. “What matters here is the duration of the rise in prices and the conflict itself. The shorter the duration, the more likely the impact will be temporary and the economy resilient.”
