Gas prices at Sunoco Gas Station in Media, Pennsylvania, USA on Monday, March 2, 2026. Oil prices rose by the most in four years as the first effects of the Middle East war began to be felt. Traffic in the Strait of Hormuz has come to a near standstill and Saudi Arabia’s major oil refineries have been disrupted, highlighting threats to supply in one of the world’s biggest producing regions. Photographer: Matthew Hatcher/Bloomberg via Getty Images
Matthew Hatcher | Bloomberg | Getty Images
Just as President Donald Trump claims inflation is on the rise, a war involving Iran could send prices soaring again, undermining his central argument for lower interest rates.
Oil prices soared overnight as markets reacted to the escalation in the region following joint US and Israeli attacks. West Texas Intermediate Futures Although it has increased by more than 5%, brent crude oil futures Up about 6%, both were down from overnight highs but still significantly higher.
The rise in oil prices adds further weight to recent indicators that although inflation is well below the highs of several years ago, underlying price pressures remain. Historically, rising energy costs have often preceded a rise in broad-based inflation.
Generally speaking, “wars have been proven to be ‘inflationary’ because they involve negative supply shocks,” writes Thierry Wismann, global currency and interest rate strategist at Macquarie Group. “In fact, even before the new war between the United States and Iran began, oil prices were inflated by hoarding, and since hostilities began, prices have been pushed up by rising insurance premiums and forced rerouting of maritime shipping.”
Beyond energy markets, there are signs that inflationary pressures may be building.
The producer price index (excluding food and energy), a measure of wholesale costs and a proxy for pipeline inflation, rose 0.8% in January, more than expected. This brings the 12-month interest rate to 3.6%, still well above the Federal Reserve’s 2% target.
Additionally, the Supply Management Association reported on Monday that more than 70% of business owners said prices had increased in February, according to the Manufacturing Price Index, an increase of 11.5 percentage points from the previous month.
Still, most economists say the impact of rising oil prices is difficult to measure and could ultimately be temporary, as has been the case with past Middle East conflicts.
time is the key
Economists say the duration of the war will be crucial. Prolonged disruptions to transportation routes, higher insurance premiums, and rerouting of supply chains could amplify inflationary pressures beyond the direct impact of higher gasoline prices.
“The conflict is still in its early stages, so it is unclear at this point whether the price increases will be sustainable over the medium term,” said Ravikanth Rai, associate managing director for energy and natural resources at Morningstar. “It is difficult to determine whether there will be structural impacts on oil and gas supplies from this region.”
Additionally, because the United States produces a larger proportion of its own energy, high oil prices have less of an impact on the broader economy than they once did.
“In today’s U.S. economy, surging oil prices do not pose the same significant downside risks to economic growth and inflation as they did half a century ago,” said Joseph Brusuelas, chief economist at RSM. “The American economy is much less exposed to economic and inflationary disruptions, even though it has tripled in overall size.”
According to one estimate, a $10 increase in oil prices increases inflation by about 0.2 percentage points and reduces economic growth by 0.1 percentage points. Current oil price movements are below that threshold, and the near-term economic impact is expected to be modest.
Stagflation risk is back
Even so, cross-currents remain. The U.S. labor market is showing signs of softening, while the outlook for tariffs and fiscal policy remains uncertain, adding to an economic climate that has been resilient but shows signs of cooling toward the end of 2025.
Some economists have warned of the risk of stagflation, when rising prices and slowing growth occur at the same time.
“Depending on how long Middle East tensions persist, the risk of stagflation could reignite, given that growth in most regions is still recovering from the pandemic, trade and geopolitical tensions,” said Ipek Ozkardeskaya, senior analyst at Swissquote.
Taken together, these developments suggest that inflation may be facing new pressures from both geopolitical shocks and underlying cost trends, complicating the gradual recovery toward the Fed’s 2% target.
Markets on Monday increasingly expected the central bank to keep rates on hold at its March meeting and possibly into the summer as officials consider competing factors: high energy prices and uneven growth.
“While this conflict raises the risk of stagflation for the global economy, it is unfolding against a backdrop of a favorable combination of growth policies and resilient earnings,” said Emmanuel Cau, head of European equity strategy at Barclays.
Cau added that if the conflict ultimately leads to stability in the region, it could even be “negative for oil and positive for growth in the medium term.”
All of this means that “higher oil prices will naturally attract the Fed’s attention,” said Andrew Hollenhorst, an economist at Citigroup. “However, commodity price movements, especially if they are short-term, are typically ‘seen through’ by Fed officials and may be modest in any case.”
