A potential inflation surge from escalating tensions in the Iran conflict, sparked by US-Israel strikes, endangers the fragile global economic rebound expected this year. Oil and gas prices have surged despite pledges to secure tankers through the Strait of Hormuz, prompting central bankers and economists to caution that extended fighting could drive up consumer prices worldwide and shatter growth projections.
IMF Warns of Growth Slowdown
Kristalina Georgieva, International Monetary Fund managing director, noted on Friday that a sustained 10% rise in energy prices over a year would elevate global inflation by 40 basis points and trim economic growth by 0.1-0.2%. “The world economy has been remarkably resilient. Shock after shock, and yet growth is at 3.3%,” Georgieva stated in an interview.
Energy Shock Overshadows Other Risks
Economists highlight that spikes in energy and transport costs, while burdensome for households and firms, might pale against broader market instability from the strikes on Iran, amid concerns over AI stock valuations and US import tariffs. “It’s not like this war has started with the world in a settled place,” observed Lord Jim O’Neill, former chief economist at Goldman Sachs Asset Management and ex-government adviser.
Geopolitical Fallout and Retaliation
Iran’s counterstrikes on Kuwait, Dubai, Saudi Arabia, and Azerbaijan threaten to reshape global alliances, potentially away from Western interests. O’Neill, a crossbench peer, criticized the limited forethought given to the geopolitical fallout from the assassination of Ayatollah Ali Khamenei and ensuing bombings. “The Gulf states will be thinking the US is an unreliable partner and be drawn towards China, India and Brazil,” he said. Saudi Arabia, the United Arab Emirates, and Kuwait report hits on key airports, oil refineries, and gas facilities from Iranian rockets and drones. Attacks on desalination plants could spark regional unrest, as these supply vital fresh water.
Oil Supply Disruptions Drive Prices Higher
Nearly 20% of global oil flows through the Strait of Hormuz. Analysis from Bloomberg Economics indicates a 1% supply drop lifts oil prices by 4%, implying a multi-month closure could push prices 80% above pre-conflict levels to around $108 per barrel. Oxford Economics forecasts year-end inflation in the UK and eurozone rising 0.5-0.6 percentage points above prior estimates, from January’s 3% in the UK and February’s 1.9% in the eurozone.
US Economy Mixed Amid Higher Costs
US growth projections hold at 2.2% this year, buoyed by fracking firms’ profits offsetting wholesale energy hikes. Yet consumers face pain from a 17% Brent crude jump, with pump prices up 15 cents per gallon on average since last Saturday, per GasBuddy data. Long-term supply chain issues could exacerbate cost-of-living woes that contributed to Joe Biden’s election loss. President Trump struggles to reassure the public on stability.
Central Bank Responses Evolve
Trump’s Federal Reserve chair nominee, Kevin Warsh, may slash rates in May despite rising inflation, aligning with administration goals. Markets now see a 97% chance of steady rates this month pending conflict developments. The National Institute of Economic and Social Research projects UK and euro area growth dipping 0.2%, trimming UK GDP from 1.1% to 0.9% and euro area from 1.2% to 1%.
In the UK, diesel climbs 5p to 147p per litre—the highest since August 2024—while petrol rises 3p to 136p, per RAC figures, squeezing households amid election pressures. Polls show 88% of Britons view cost of living as the top issue, with 42% of Americans rating the economy poorly.
European Leaders Sound Alarm
Three European Central Bank policymakers, including Vice-President Luis de Guindos and governors from Germany and Finland, warn a prolonged Middle East war could boost eurozone inflation and curb growth. De Guindos stated: “The baseline (is) that this is going to be short-lived. If it is longer, then there is a risk that inflation expectations will change.”
Bank of England rate-setter Alan Taylor urged against rate hikes for imported energy shocks, prioritizing investment and jobs. Oxford Economics’ Michael Saunders, a former central bank official, anticipates UK rates steady at 3.75% if tensions persist, reversing prior cut expectations. Mortgage rates have already risen, hitting borrowers hard.
