A new conflict involving Iran could shake the U.S. and global economies, leading to higher prices and slower growth, even if the fighting ends soon. Economists warn that inflationary pressures, lower output and more expensive loans could persist well after a ceasefire. This concern reflects how energy markets, shipping routes and investor confidence react when risk increases in the Middle East.
“The U.S. and global economies could pay a high price for the war against Iran in the form of higher inflation, slower economic growth, and higher borrowing costs for some time to come, even if the conflict ends tomorrow. »
The immediate problem is energy. Much of the world’s oil transported by sea passes through the Strait of Hormuza narrow channel near Iran. Tensions there often drive up crude prices, which has a direct impact on the costs of fuel, transportation and food. This effect can happen quickly and spread widely.
Why does this shock hit so hard?
History shows how crises in the Middle East spill over into the real economy. The oil shocks of the late 1970s and the Gulf War in 1990 drove up energy costs and slowed growth. More recent alerts, including tanker attacks in 2019 and supply disruptions in 2022, have revealed how sensitive inflation is to shipping and fuel risks.
Today’s supply chains are simple and global. When energy and insurance costs rise, businesses pass those costs on to customers. Households feel it at the pump and on grocery store shelves. Business investment often slows as uncertainty increases and profit margins shrink.
Energy, shipping and insurance risks
Oil markets tend to incorporate a risk premium in times of conflict. Even small supply disruptions can trigger large price swings when supplies are tight. If shipments through Hormuz face delays or higher insurance rates, refiners and shippers adjust routes and schedules, increasing costs and delays.
- Higher crude prices can increase overall inflation in months, not years.
- Marine insurance premiums and freight rates often increase during conflict alerts.
- Commodity traders widen spreads, increasing volatility for buyers and sellers.
Natural gas markets could also feel strain if regional flows or major liquefied natural gas routes are disrupted. Electricity prices would then reflect these pressures, particularly in regions dependent on imports.
Central banks face difficult trade-offs
For the Federal Reserve and the European Central Bank, a new price shock complicates policy. If inflation picks up again, rate cuts could be delayed. Some policymakers might even consider further hikes if expectations weaken. This would increase borrowing costs for mortgages, credit cards and business loans.
Yet higher interest rates are weighing on growth at a fragile time. Surveys on the manufacturing sector have been mixed. Consumers have drawn on some savings reserves. A policy mistake could tighten credit too much, causing demand to fall just as costs rise. This is the classic energy shock dilemma.
Markets, corporate balance sheets and jobs
Markets generally respond with a flight to safety. Government bond yields may initially fall as investors seek protection, then rise if inflation fears dominate. Credit spreads can widen, increasing the cost of capital for lower-rated companies.
Companies with large fuel needs (airlines, trucks, chemicals) could experience pressure on their margins. Small businesses that rely on short-term financing may face higher interest costs. Recruitment plans often slow down when managers cannot confidently forecast demand or input costs.
Who could win – and at what cost?
Energy producers and defense contractors often see their orders and revenues increase during geopolitical shocks. Some oil and gas exporters benefit from higher prices. But the overall effect can still be negative if consumers spend more on energy and less elsewhere, thereby weakening overall demand.
What to watch next
Investors and political analysts follow several signals:
- Prices of crude and refined products and size of any risk premium.
- Shipping activity and insurance rates across key choke points.
- Inflation expectations in market measures and consumer surveys.
- Central bank advice on interest rates and balance sheets.
- Advice on business profits on costs, pricing and hiring.
Even a short-term conflict can have serious economic consequences. Energy markets are adjusting slowly, and households cannot easily give up fuel and food. If inflation remains high, borrowing costs could remain high for longer than businesses and consumers expect. For now, the evolution of prices, politics and growth depends on easing tensions and maintaining supply routes. The coming weeks will show whether the shock fades or reshapes the outlook for the rest of the year.
