How High Could Global Inflation go?

The Price of War: How High Could Global Inflation Go?

Before the bombs fell, the global economy was, by most measures, in reasonable shape. Inflation had cooled from the painful highs of the early 2020s. Central banks were cautiously eyeing rate cuts. Consumers, while still stretched, were adjusting. Then, on 28 February 2026, the war in Iran began — and the calculus changed almost overnight.

The conflict's most immediate economic weapon has been geography. The Strait of Hormuz, the narrow waterway between Iran and the Arabian Peninsula, is the jugular vein of global energy supply. Around 20 percent of the world's oil passes through it, along with vast quantities of liquefied natural gas and other commodities. Iran's closure of the strait has triggered what the International Energy Agency has called the largest supply disruption in the history of the global oil market — a verdict that gives some sense of the scale of what is unfolding.

The numbers bear it out. Brent crude, which was trading at around $73 a barrel before the conflict erupted, surged sharply in the first days of fighting and has remained elevated and volatile ever since. At the peak of tensions, it briefly exceeded $114 a barrel as markets priced in the worst-case scenarios. Goldman Sachs has revised its full-year Brent forecast upward to $85, though analysts at Wood Mackenzie have warned that $150 to $200 a barrel is not outside the realm of possibility if disruptions persist. For ordinary consumers, the consequences have already arrived at the petrol station and the supermarket checkout.

In the United States, the March Consumer Price Index laid bare the damage in stark terms. Inflation climbed to a 3.3 percent annual rate — the highest reading in nearly two years — up from 2.4 percent in February. Energy prices drove almost the entire increase, rising 10.9 percent in a single month, the largest monthly gain since 2005. Gasoline surged 21.2 percent — the steepest one-month jump since records began in 1967. The silver lining, such as it is, lies in the core reading: strip out food and energy, and prices rose just 0.2 percent in March, suggesting the shock has not yet rippled into the broader economy. That distinction matters enormously for central banks, but it offers cold comfort to anyone filling up their car or heating their home.

Globally, the picture is similarly alarming. The OECD has projected that the war will push average global inflation roughly 1.2 percentage points higher than it would otherwise have been, potentially bringing it to around 4 percent in the near term. Barclays has modelled a scenario in which oil averages $100 a barrel across 2026, estimating that this would shave 0.2 percentage points off global growth while adding 0.7 percentage points to headline inflation. Europe faces a particularly acute version of the problem. The European Central Bank has warned that a prolonged conflict could tip major energy-dependent economies, Germany and Italy chief among them, into technical recession by year's end.

The inflationary threat does not stop at the petrol pump. The Strait of Hormuz is not just an oil corridor — it is also central to the global trade in fertilisers. Over 30 percent of the world's urea, a key agricultural input derived from natural gas, is exported from Gulf countries through the strait. Disruptions to fertiliser supply feed directly into the cost of producing wheat, corn, and other staples, threatening to push food prices higher in countries far removed from the conflict zone. The Food Policy Institute in London has warned of long-term food price increases as a consequence. Beyond food, other commodities — helium, aluminium, and a range of petrochemicals — also transit the strait, spreading the supply shock into corners of the economy that rarely make front pages.

For central banks, the war has arrived at the worst possible moment. The Federal Reserve, which had pencilled in one rate cut for 2026, now finds itself paralysed. Futures markets are pricing in a roughly 60 percent probability that rates will remain unchanged for the rest of the year. Some Fed policymakers have even floated the possibility that a hike may become necessary if energy prices succeed in de-anchoring inflation expectations — the moment, as Cornell economist Eswar Prasad put it, when the expectation of more inflation creates the very inflation it anticipates, in a self-fulfilling loop. The Fed's preferred inflation gauge, the core PCE index, was already running at 2.8 percent annually in February, stubbornly above the 2 percent target, before the war's effects had even registered in the data.

There is one scenario in which much of this resolves without lasting damage: a swift and durable ceasefire. A two-week pause between the US and Iran was announced earlier this week, and energy markets responded with immediate relief. But as any economist will note, oil prices tend to spike fast and fall slowly — what traders call the "rockets and feathers" effect. Mark Zandi, chief economist at Moody's Analytics, was blunt about the timeline: higher prices for airline tickets, groceries, and transport costs will be felt through much of the year regardless of how quickly the guns fall silent. The supply chains that the war has disrupted do not snap back at the pace of a ceasefire announcement.

What distinguishes this crisis from previous energy shocks is the breadth of its reach. The 1970s oil crises were devastating, but the global economy was less interconnected, supply chains less fragile, and the just-in-time logistics model that now governs everything from food retail to car manufacturing did not yet exist. Today, a blockade in a narrow waterway between Iran and Oman can empty fuel stations in Australia, raise bread prices in West Africa, and force Pacific island governments to ration petrol within weeks. The world has built extraordinary efficiency into its supply chains — and extraordinary vulnerability along with it.

Whether the coming months bring a soft landing or something harder will depend, as it so often does, on decisions made in rooms far from the economists' models: in Tehran, in Washington, and in the corridors of whatever mediation effort is currently underway. The global economy can absorb an energy shock. It has done so before. But time, as every analyst agrees, is the one variable it cannot afford to waste.

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