Will Middle East conflict lead to stagflation?
Key takeaways
1. Where are we today?
Conflict in the Middle East has led to the largest energy supply disruption in history. Commodity prices have surged, raising concerns about the outlook for inflation, global growth, monetary policy, and financial markets.
2. What are the risks?
Higher commodity prices threaten to increase inflation, strain consumers, and heighten the risk of policy mistakes by central banks. The threat of stagflation — a combination of low growth and high inflation — has been rising, in our view.
3. Where do we go from here?
The US economy is less vulnerable to energy shocks now than in the past. In our view, growth should remain resilient, core inflation contained, and Federal Reserve (Fed) easing on track even in the face of current disruptions. More severe disruptions could alter that view.
What’s the concern?
Source: Bloomberg L.P., as of March. 30, 2026. Past performance does not guarantee future results.
• The closure of the Strait of Hormuz and attacks on energy infrastructure have resulted in a sharp rise in commodity prices.
• Critical economic inputs are becoming more expensive, complicating the outlook for inflation, global growth, and monetary policy.
What’s the risk?
Source: Bloomberg L.P., as of March 30, 2026. The Consumer Price Index (CPI) is a measure of the change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Left-hand side (lhs) and right-hand side (rhs).
• Severe energy disruptions in 1973, triggered by the Yom Kippur War and OPEC oil embargo, led to higher inflation, Fed rate hikes, and eventually a recession. The Iranian Revolution in 1979 produced a similar outcome.
• Investors are increasingly concerned that conflict in the Middle East could spark another inflation shock, just years after the energy crisis brought on by Russia’s invasion of Ukraine.
• The US economy today, however, is fundamentally different from 1973 and 1979. And unlike in 2022, when supply chains were still recovering from the COVID-19 pandemic, the current supply disruption is largely limited to commodity markets.
What’s the reality?
Sources: Bloomberg L.P. and US Energy Information Administration, as of March. 27, 2026. X-axis on left chart represents futures implied Brent crude oil price x-number of months from today. The oil futures curve shows the prices of oil contracts for delivery at different future dates, reflecting market expectations of supply and demand over time. Brent crude oil comes from the North Sea and is a global benchmark for oil prices. British thermal unit (BTU). Gross domestic product (GDP). Left-hand side (lhs) and right-hand side (rhs).
• The futures market suggests that oil prices will fall in the coming months. This likely reflects the belief that hostilities with Iran will soon end, but that production capabilities may still be impacted.
• If the market is correct and oil prices are ~$80 per barrel in a year, that outcome likely wouldn’t be a dealbreaker for the economy.
• That’s because the US is far less vulnerable to higher energy prices now than in the past. For example, during the 1973 oil embargo, the US required roughly 12,000 British thermal units (Btus) to produce $1 of gross domestic product. Today, that figure is closer to 4,000 Btus. The US has also become more energy independent.
Investment Risks
The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations), and investors may not get back the full amount invested.
