Soaring oil prices could exacerbate inflationary pressures and weaken the Federal Reserve's case for cutting interest rates.
2026-03-03 11:49:50
As President Trump has consistently maintained, inflation is under control. However, the war with Iran could trigger a new wave of price increases, potentially undermining his core argument for interest rate cuts.
Following the joint attacks by the United States and Israel, regional tensions escalated, and markets reacted, with oil prices surging overnight. This rise in oil prices adds further evidence to recent indicators. Although inflation is well below its peak levels of several years ago, underlying price pressures remain. Historically, soaring energy costs have often preceded increases in overall inflation.
Thierry Wizman, global foreign exchange and interest rate strategist at Macquarie Group, wrote: “Overall, war has proven to have an inflationary effect because it is associated with negative supply shocks. In fact, even before the outbreak of the new Iraq War, oil prices had risen due to hoarding, and since the start of the war, oil prices have been further pushed up by rising insurance premiums and the forced rerouting of shipping routes.”
Outside of the energy market, there are also signs that inflationary pressures may be intensifying.
The January PPI rose 0.8% after excluding food and energy, exceeding expectations. This data brings the 12-month inflation rate to 3.6%, still well above the Federal Reserve's target of 2%.
In addition, the Institute for Supply Management (ISM) released a report on Monday stating that its manufacturing price index showed that more than 70% of managers said prices rose in February, an increase of 11.5 percentage points from the previous month.
Even so, most economists still believe that the impact of rising oil prices is difficult to assess and may ultimately be only temporary, like previous Middle East conflicts.
Economists say the duration of this war will be crucial. Prolonged disruptions to shipping routes, rising insurance premiums, and the reorganization of supply chains could exacerbate inflationary pressures beyond the immediate impact of rising gasoline prices.
Ravikanth Rai, deputy director of energy and natural resources at Morningstar, said: “It is unclear whether this price increase can be sustained in the medium term, as the conflict is still in its early stages and it is difficult to determine whether it will have a structural impact on oil and gas supplies in the region.”
Furthermore, as the United States produces more energy domestically, the broader economic impact of soaring oil prices is different from the past.
Joseph Brusuelas, chief economist at RSM, said: “The negative impact of a sharp rise in oil prices on overall economic growth and inflation in today’s U.S. economy is very different from what it was half a century ago. The U.S. economy is much less affected by economic and inflationary shocks, and its overall size has tripled.”
One estimate suggests that every $10 increase in oil prices leads to a rise in inflation of approximately 0.2 percentage points, while simultaneously dragging down economic growth by 0.1 percentage points. Given that current oil price fluctuations have not yet reached this threshold, the short-term impact on the economy is expected to be relatively mild.
However, various headwinds remain. The U.S. labor market has shown signs of weakness, and the outlook for tariffs and fiscal policy remains uncertain, which means that while the overall economic situation has remained resilient, it is also showing signs of cooling by the end of 2025.
Some economists have warned of the risk of "stagflation," which is when prices rise while economic growth slows.
“The risk of stagflation could resurface, given that economic growth in most regions has not yet fully recovered from the impact of the pandemic, trade tensions, and geopolitical tensions, depending on how long the tensions in the Middle East persist,” said Ipek Ozkardeskaya, senior analyst at Swissquote.
In summary, inflation may be facing renewed shocks from both geopolitical factors and potential cost trends, making the process of gradually returning to the Fed's 2% target level more complicated.
On Monday, markets heightened expectations that the central bank would keep interest rates unchanged at its March meeting and for months to come. Meanwhile, officials were also weighing conflicting factors such as rising energy prices and uneven economic growth.
"While this conflict increases the likelihood of stagflation in the global economy, it comes at a time of favorable economic growth policy mix and resilient earnings," said Emmanuel Cau, head of European equity strategy at Barclays.
Cau also stated that if the conflict ultimately leads to greater stability in the region, it could even have a "negative impact on oil but positive impact on economic growth" effect in the medium term.
“All of this means that rising oil prices will naturally attract the attention of the Federal Reserve,” wrote Citigroup economist Andrew Hollenhorst. “But fluctuations in commodity prices (especially short-term ones) are usually ignored by Fed officials and are likely to be mild anyway.”
Following the joint attacks by the United States and Israel, regional tensions escalated, and markets reacted, with oil prices surging overnight. This rise in oil prices adds further evidence to recent indicators. Although inflation is well below its peak levels of several years ago, underlying price pressures remain. Historically, soaring energy costs have often preceded increases in overall inflation.
Thierry Wizman, global foreign exchange and interest rate strategist at Macquarie Group, wrote: “Overall, war has proven to have an inflationary effect because it is associated with negative supply shocks. In fact, even before the outbreak of the new Iraq War, oil prices had risen due to hoarding, and since the start of the war, oil prices have been further pushed up by rising insurance premiums and the forced rerouting of shipping routes.”
Outside of the energy market, there are also signs that inflationary pressures may be intensifying.
The January PPI rose 0.8% after excluding food and energy, exceeding expectations. This data brings the 12-month inflation rate to 3.6%, still well above the Federal Reserve's target of 2%.
In addition, the Institute for Supply Management (ISM) released a report on Monday stating that its manufacturing price index showed that more than 70% of managers said prices rose in February, an increase of 11.5 percentage points from the previous month.
Even so, most economists still believe that the impact of rising oil prices is difficult to assess and may ultimately be only temporary, like previous Middle East conflicts.
Economists say the duration of this war will be crucial. Prolonged disruptions to shipping routes, rising insurance premiums, and the reorganization of supply chains could exacerbate inflationary pressures beyond the immediate impact of rising gasoline prices.
Ravikanth Rai, deputy director of energy and natural resources at Morningstar, said: “It is unclear whether this price increase can be sustained in the medium term, as the conflict is still in its early stages and it is difficult to determine whether it will have a structural impact on oil and gas supplies in the region.”
Furthermore, as the United States produces more energy domestically, the broader economic impact of soaring oil prices is different from the past.
Joseph Brusuelas, chief economist at RSM, said: “The negative impact of a sharp rise in oil prices on overall economic growth and inflation in today’s U.S. economy is very different from what it was half a century ago. The U.S. economy is much less affected by economic and inflationary shocks, and its overall size has tripled.”
One estimate suggests that every $10 increase in oil prices leads to a rise in inflation of approximately 0.2 percentage points, while simultaneously dragging down economic growth by 0.1 percentage points. Given that current oil price fluctuations have not yet reached this threshold, the short-term impact on the economy is expected to be relatively mild.
However, various headwinds remain. The U.S. labor market has shown signs of weakness, and the outlook for tariffs and fiscal policy remains uncertain, which means that while the overall economic situation has remained resilient, it is also showing signs of cooling by the end of 2025.
Some economists have warned of the risk of "stagflation," which is when prices rise while economic growth slows.
“The risk of stagflation could resurface, given that economic growth in most regions has not yet fully recovered from the impact of the pandemic, trade tensions, and geopolitical tensions, depending on how long the tensions in the Middle East persist,” said Ipek Ozkardeskaya, senior analyst at Swissquote.
In summary, inflation may be facing renewed shocks from both geopolitical factors and potential cost trends, making the process of gradually returning to the Fed's 2% target level more complicated.
On Monday, markets heightened expectations that the central bank would keep interest rates unchanged at its March meeting and for months to come. Meanwhile, officials were also weighing conflicting factors such as rising energy prices and uneven economic growth.
"While this conflict increases the likelihood of stagflation in the global economy, it comes at a time of favorable economic growth policy mix and resilient earnings," said Emmanuel Cau, head of European equity strategy at Barclays.
Cau also stated that if the conflict ultimately leads to greater stability in the region, it could even have a "negative impact on oil but positive impact on economic growth" effect in the medium term.
“All of this means that rising oil prices will naturally attract the attention of the Federal Reserve,” wrote Citigroup economist Andrew Hollenhorst. “But fluctuations in commodity prices (especially short-term ones) are usually ignored by Fed officials and are likely to be mild anyway.”
- Risk Warning and Disclaimer
- The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.
