Iran War Inflation Could Take Years to Fade After Conflict Ends

• Inflation driven by the Iran war is likely to take two to three years to fully dissipate after the conflict ends, according to analysis by Oxford Economics, underscoring the persistent nature of oil-driven price shocks and their long-lasting economic impact.
• Historically, inflation spikes linked to oil disruptions, such as the 1979 Iranian revolution and the 2022 Ukraine war, have been significantly slower to unwind, with less than a third dissipating after one year, in contrast to non-oil shocks which tend to fade more quickly.
• The ongoing conflict has severely disrupted oil shipments, with the Strait of Hormuz still closed to traffic, cutting off around 20% of global oil supply and pushing Brent crude above $100 per barrel, reinforcing tight supply conditions in global energy markets.
• Higher oil prices have already fed through to fuel costs, with U.S. gasoline prices rising by more than $1 per gallon, while elevated transportation costs are expected to pass through to a wide range of goods and services, broadening inflationary pressures across the economy.
• In addition to energy, other key inputs such as aluminum and fertiliser have also seen sharp price increases, amplifying cost pressures across industrial production and agriculture. Forecasters at Goldman Sachs have pencilled in prices, as measured by Personal Consumption Expenditures, rising 3.1% over the year in 2026, a full percentage point above their prewar forecast.
• A key driver of this persistence is that historically, oil exports from conflict zones have been slow to recover to prewar levels. Three years after the 1991 Gulf War, for instance, oil production in Iraq and Kuwait was still down more than 60%.
• "Despite the historical evidence of persistent economic scars from major oil supply shocks, business and investor reactions have been relatively contained to date," noted Jamie Thompson, head of macro scenarios at Oxford. "This highlights the risk of an abrupt adjustment in sentiment, particularly in the event of a more prolonged US/Israel war with Iran."

(Source: Yahoo Finance)