Iran, energy, and the return of inflation anxiety

The conflict around Iran is no longer just a geopolitical story. It is becoming a macro story again. Since the war began on February 28, oil has swung sharply higher, Brent briefly touched $119.50 earlier this week, and market attention has shifted from disinflation back toward supply risk. When a conflict threatens one of the most important energy corridors in the world, inflation expectations stop feeling abstract and start feeding directly into fuel, freight, production costs, and rate expectations. That matters because the Strait of Hormuz is not a marginal route. U.S. Energy Information Administration data show that about one fifth of global oil consumption and about one fifth of global LNG trade pass through it. Europe already called a gas coordination meeting after benchmark European gas prices jumped by more than 50 percent in the first days of the conflict, while Qatar related disruptions reinforced the view that this is not only an oil shock but a broader energy shock. The inflation channel is real, but it should be framed carefully. Higher oil and gas prices do not automatically create a new inflation regime by themselves. What they do is raise the odds that energy costs seep into transport, food, utilities, margins, and consumer psychology. The IMF said this week that every persistent 10 percent increase in oil prices can add about 40 basis points to global headline inflation and trim global output by 0.1 to 0.2 percent. A recent ECB working paper also found that a 10 percent gas supply shock can lift euro area headline inflation by about 0.6 percentage points after one year. This is why markets have reacted so fast. Reuters reported that traders have cut back expectations for Federal Reserve easing to about 20 basis points this year, down from about 50 basis points a month ago, while the two year Treasury yield has risen by roughly 35 basis points since the war began. In plain terms, markets are starting to price a world where central banks get less room to ease because the energy shock arrives before inflation is fully behind them. The conflict is also landing on top of an already more fragile trade system. Reuters, citing Yale Budget Lab, reported that the average U.S. tariff rate rose to nearly 17 percent in 2025 from less than 3 percent at the end of 2024. The IMF had already warned in April 2025 that trade tensions and policy uncertainty would weigh on global activity, projecting growth of 2.8 percent in 2025 and 3.0 percent in 2026. The World Bank later estimated global growth around 2.7 percent in 2025 and noted that inflation had been easing before this latest shock. That matters because an energy shock hurts more when growth is already modest and trade is already distorted. So the bigger risk is not simply a jump in headline CPI next month. The bigger risk is stickier inflation across categories over time, especially if higher energy, shipping, and insurance costs persist and firms decide they cannot absorb them. This is where the current moment starts to feel more structural than temporary. Some call this a new world order. In macro terms, it looks more like a world of higher trade friction, more expensive supply security, and less room for policy mistakes. The security channel matters too, but precision is important here. The evidence today points to elevated risk, not a confirmed wave of attacks across Western economies. Europol said the level of terrorist threat and violent extremism in the European Union is considered high and warned that Iran linked groups could pursue terrorism, cybercrime, intimidation, and financing activities. In the United States, a Department of Homeland Security assessment reviewed by Reuters said Iranian cyber attacks were likely, while a large scale physical attack remained unlikely. Political messaging is adding to the confusion. President Trump has alternated between projecting victory and warning that the United States will hit Iran very hard over the coming week, while Reuters has reported internal debate inside the White House over when and how to declare success. Inside Iran, President Masoud Pezeshkian has apologized to Gulf states, yet Reuters also reports visible splits between more pragmatic voices and hardliners around the Revolutionary Guards. That is one reason markets still treat this conflict as unfinished, despite repeated claims that the worst may already be behind us. For the next few weeks, the cleanest way to follow this story is not through rhetoric alone but through a short macro lens: oil, gas, shipping, inflation expectations, consumer confidence, and central bank language. If oil normalizes and shipping flows improve, this may end up looking like a sharp but temporary shock. If energy and transport disruptions persist, the world could move from weak disinflation to slow growth with sticky prices. That is the real risk to watch now.