Strikes targeting an oil depot on the outskirts of Tehran marked the latest escalation in the nine-day conflict between the United States and Israel against Iran, as concerns mount over the potential for a prolonged war to destabilize the global economy. The Iranian military confirmed the Strait of Hormuz remains open, but warned it would target any U.S. Or Israeli ships attempting passage, according to a report from Al Jazeera.
Economists and central bankers are warning that a sustained conflict could trigger an inflation shock, potentially derailing a fragile global economic recovery. The effective closure of the Strait of Hormuz, a vital waterway for roughly 20% of the world’s crude oil and natural gas, has already sent global crude oil prices up more than 10%, according to NPR. Natural gas prices in Europe and Asia have risen even more sharply.
International Monetary Fund Managing Director Kristalina Georgieva told Bloomberg that a persistent 10% increase in energy prices could push up global inflation by 40 basis points and slow global economic growth by 0.1-0.2%. “The world economy has been remarkably resilient. Shock after shock, and yet growth is at 3.3%,” she said.
The potential economic fallout extends beyond energy prices. Some economists argue that the destabilization of financial markets, already anxious about ballooning AI stocks and U.S. Import tariffs, could overshadow the direct impact of rising energy costs. Lord Jim O’Neill, former chief economist of Goldman Sachs Asset Management, noted that the current situation is far from stable, adding, “It’s not like this war has started with the world in a settled place.”
O’Neill suggested the White House may have underestimated the geopolitical consequences of its actions, including the assassination of Ayatollah Ali Khamenei and the subsequent bombing campaign. He warned that Gulf states may seek closer ties with China, India, and Brazil, viewing the U.S. As an unreliable partner. Saudi Arabia, the United Arab Emirates, and Kuwait have already experienced attacks on critical infrastructure, including airports, oil refineries, and gas plants.
The potential for attacks on Iran’s desalination plants, which provide fresh water to the region, raises the specter of social unrest. Approximately 20 million barrels of oil per day typically transit the Strait of Hormuz. Bloomberg Economics estimates that a 1% supply disruption could raise oil prices by 4%, suggesting a closure of the strait for several months could push prices to around $108 a barrel.
Oxford Economics projects that inflation in the UK and Eurozone could be 0.5 to 0.6 percentage points higher than previously expected. UK inflation stood at 3% in January, while the Eurozone recorded 1.9% in February. In the US, economists currently forecast growth of 2.2% this year, with gains for U.S. Fracking companies offsetting higher wholesale energy costs. Yet, U.S. Consumers are already feeling the impact, with average gasoline prices rising 15 cents a gallon since last Saturday, according to GasBuddy, a price tracker service.
In the UK, diesel prices have risen to 147p a litre – the highest since August 2024 – while petrol has increased to 136p on average, according to the RAC. The National Institute of Economic and Social Research estimates that UK and Eurozone economic growth could fall by 0.2% if the conflict persists, reducing the UK’s GDP growth from 1.1% to 0.9% and the Eurozone’s from 1.2% to 1%.
European Central Bank policymakers have cautioned that a prolonged and wider conflict could lead to higher inflation, both present and expected. ECB Vice-President Luis de Guindos stated, “The baseline (is) that What we have is going to be short-lived. If it is longer, then there is a risk that inflation expectations will change.”
President Donald Trump has nominated Kevin Warsh as the incoming chair of the Federal Reserve, and is expected to push for interest rate cuts even if inflation continues to rise. Financial markets currently assign a 97% probability to the Fed holding rates steady at its upcoming meeting, pending developments in the Iran conflict. UK mortgage lenders have already begun increasing interest rates on home loans.
