The global inflation rerun

As if tariffs, AI disruption, and this cursed latest season of Love Is Blind weren’t enough to frazzle the economy, Americans now have another reason to feel jittery: The war with Iran could trigger a fresh bout of inflation.

Like the faint beeping of an appliance in your kitchen you can’t quite find the source of, inflation hasn’t fully gone away since it spiked in 2022, even though everyone got used to it being the background. But just when it feels like we’ve finally made progress towards the Fed’s 2% goal, the US and Israel attacked Iran, which immediately spiked the prices of oil and natural gas.

Zoom out: When oil and gas prices rise, they push up the price of fuel, transportation, and a slew of consumer goods. When energy gets more expensive, the costs are passed on to the consumer in the form of higher prices on store shelves.

Our friends over at Bloomberg modeled four potential scenarios: In the worst case, if fighting continues to be severe and protracted, a prolonged closure of the Strait of Hormuz could result in oil prices reaching $108 per barrel, which is roughly 80% higher than they were before the war started. That would trigger a severe resurgence of inflation across the world, wreaking havoc on prices and the stability of the US economy.

But in the case of a ceasefire or the immediate collapse of the Islamic Republic of Iran, prices could come down to about $65 per barrel. In another, more likely scenario, oil prices settle at $80 per barrel if the war continues, but there are limited attacks on energy suppliers and facilities.

The Fed is stuck

The dilemma leaves the Federal Reserve in a tough position. President Trump has repeatedly demanded that rates come down, and some experts have agreed, pointing to a slowing labor market and faltering consumer confidence as reasons for an economic pick-me-up.

But the central bank has thus far been reluctant to lower rates, and the risk of high oil prices makes it even less likely now. After all, inflation never even sank to the Fed’s 2% target before the war began, and costs from tariffs were just starting to reach consumers right as the Supreme Court ruled Trump’s retaliatory tariffs illegal.

Right now, traders are pricing in a 97.3% chance that the Fed keeps rates steady in its next meeting this month—up from 90% a month ago.

Now, treasury yields are skyrocketing as traders pare back expectations that the Fed will actually cut rates, which could spike borrowing costs across the entire economy, from mortgage rates to student loans (keep in mind, yields move inversely to bond prices).

But this isn’t the end of the world—inflation is more like a “skunk at a party,” as JPMorgan CEO Jamie Dimon described it to CNBC on Monday. “This right now will increase gas prices a little bit,” he explained. “If it’s not prolonged, there’s not going to be a major inflationary hit.”

Honestly, we’re just surprised Jamie Dimon still gets invited to parties.—LB