Iran conflict could trigger economic stagflation if war drags on too long
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Will the Iran war turn President Donald Trump’s rise in the 1980s into the stagflation of the 1970s? But if it takes too long, which the President says he plans to avoid. But as the saying goes, the enemy also has the right to vote, so what if it’s a long conflict?
As soon as Trump started bombing Iran, markets crashed, especially growth stocks like AI. Silver fell. Bonds crashed. Even gold is now down about 3%, with the initial war population giving way to the ill-fated flight to the dollar that you see in recessions.
Oil rose 10% in two days, from $67 to $74 per barrel, and rose to $86 as of the time of this writing.
Markets always react quickly and can overreact. For the broader economy, the question is how long the war will disrupt Middle East oil exports.
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A thick cloud of smoke rises from an oil storage facility hit by a US-Israeli attack in Tehran, Iran, late Saturday and into Sunday, March 8, 2026. (Vahid Salemi/AP Photo)
About 20 percent of global oil exports pass through the narrow Strait of Hormuz next to Iran. The other 30% is within range of Iranian missiles in the Gulf of Oman and the Red Sea.
The US actually imports almost none of these; Middle Eastern oil accounts for only 2% of American oil consumption. But oil markets are global, so disruptions in the Middle East cause prices to rise around the world.
According to MarineTraffic, ship traffic in the Strait of Hormuz decreased by 70 percent in the first attack. It came to a “complete halt” as of March 3, according to Lloyd’s List.
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Trump then directed the US International Development Finance Corporation to provide political risk insurance and financial guarantees for maritime trade through the Persian Gulf and the Strait of Hormuz.
This will help eliminate risks to shippers. However, it does not seem possible for traffic to fully recover until the campaign is over.
Trump is now suggesting that the war could only last four weeks. But the administration is also sending the message that the war will continue “as long as it takes.”
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Promising a long war may be a tactic to demoralize the Iranian regime. But opinion polls show that the American public is not keen on a long war.
A recent CBS poll found that a war lasting less than eight weeks was +52 in the polls, while a war lasting longer than that was -8. The polls will likely get worse if Americans’ losses increase.
According to MarineTraffic, ship traffic in the Strait of Hormuz decreased by 70 percent in the first attack. It came to a “complete halt” as of March 3, according to Lloyd’s List.
A real consequence for the economy will only occur if the war is prolonged. And these fall into three baskets: growth, employment and inflation.
DURING THE OIL CONFRONT IN THE STRAIT OF HORmuz, the USA destroyed 16 IRANIAN mine boats.
Historically, every $10 increase in oil destroys about two-tenths of a percent of economic growth. That’s a small number for an economy growing at just over 3 percent, according to the Fed’s GDPNow report. Given that $19 oil is already rising, it could reduce annual wage growth by about $300.
Still, this is on top of the expensive oil used to heat your home or gas your car. AAA says gas prices have already increased nearly 20%, from $2.98 to $3.56. Between gas, transportation costs and utilities, inflation could increase by six-tenths of a percent, which could mean another $500 in household expenses.
Meanwhile, higher oil prices and slower growth negatively impact job creation; Given the movement we’ve seen before, they could reduce job creation by 15,000 to 20,000 per month.
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A large fire and plume of smoke are seen after debris from an Iranian intercepted drone crashed into the Fujairah oil facility in Fujairah, United Arab Emirates, on Tuesday, March 3, 2026, according to officials. (Altaf Kadri/AP Photo)
That’s why it’s painful. But this is not a recession.
What put us in recession is a long war. A recent study by Deutsche Bank examined historical oil shocks and concluded that you need a sustained jump of 50% to 100% in oil to start a recession.
This means oil prices remain high, between $100 and $150.
Even then, according to Deutsche, oil only causes a recession when the economy is already limping. The 1970s, for example, are the poster child for an oil crash. But the US economy was already in stagflation due to Washington’s so-called guns-and-butter policy of fighting Vietnam while building a trillion-dollar welfare state. This triggered the “Nixon Shock”, which predated the oil embargo by several years.
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By contrast, when the bombs started, the Fed’s GDPNow was at a healthy 3% in terms of GDP growth and the latest productivity was 4.9%; It’s one of the highest rates since the Reagan boom.
This means $100 oil could put us in 1% growth territory. But unless the Fed panics about oil inflation and raises interest rates, it’s unlikely to cause a recession. This could end up putting us over the edge.
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For now, the biggest impact of the war is on oil prices. But if the war continues, if oil continues to flow into growth, employment, consumer spending and inflation, that could set off a cycle of disaster for Fed hikes.
If that happens, Trump could be throwing away his hard-earned rise ahead of the midterm elections that hand Congress to the Democrats. Who will lead us on a two-year journey of paralysis, congressional hearings and repeated accusations?
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