Global economy faces protracted war inflation despite fragile Iran-US ceasefire

While the military dimension of the conflict in Iran appears to have reached a temporary standstill, its impact on global prices remains pervasive. Economists project that the disruptions to the global oil supply, which have persisted for over a month, will continue to trigger volatility across the broader economy.

According to data cited by NerdWallet, fuel prices have surged by more than 40% since February and are not expected to decline in the near term. Airfares have also recorded significant increases during this period. New price hikes across diverse sectors, including food, apparel, and electronics, are deemed likely in the coming months, adding further pressure to already persistent inflationary trends.

The escalation began on February 28, following the launch of strikes by the US and Israel. Iran responded by closing the Strait of Hormuz, a critical transit point for global oil supplies and other essential commodities. Prior to the attacks, Brent crude, the global oil benchmark, was trading at approximately $80 per barrel; it subsequently surged past the $100 mark as the conflict intensified.

The White House has maintained an inconsistent stance regarding its objectives and the anticipated duration of the war, though it has exchanged rhetoric with Tehran regarding a potential conclusion to the hostilities. Tensions reached a critical peak when US President Donald Trump established a Tuesday deadline for a ceasefire agreement, threatening to strike Iranian infrastructure and destroy an entire “civilization” should no deal be reached.

Less than two hours before the expiration of Trump’s deadline on Tuesday night, a two-week ceasefire was secured to allow for continued negotiations toward a long-term agreement. During this pause, Iran agreed to reopen the Strait of Hormuz. However, the ceasefire has had an unstable start. On Wednesday, Iran accused the US of violating the terms of the agreement, citing continued Israeli strikes in Lebanon.

Following the announcement of the ceasefire on Tuesday night, oil prices retreated sharply to approximately $95 per barrel, while US equity markets rallied.

Despite this localized relief, analysts warn that the de-escalation may be temporary and that the economic consequences of the conflict are already deeply embedded. The impact of elevated oil prices is diffusing through the global economy, as international shipping, manufacturing, and food production remain heavily dependent on petrochemicals and natural gas. Consequently, rising energy costs are expected to drive up the price of food, commercial goods, and daily necessities, further straining household budgets already diminished by years of inflation.

The economic fallout of the war is compounded by the ripple effects of tariffs that were in place prior to the start of hostilities. On March 2, shortly after the initial strikes, the Yale Budget Lab published an updated assessment regarding the impact of tariffs on consumer prices. The report found that the costs of imported consumer goods passed on to buyers ranged from approximately 40% to 76% for “essential goods” such as electronics and clothing, and between 47% and 106% for “durable goods” like motor vehicles and household appliances.

The current inflation rate in the US stands at 2.4% according to the Consumer Price Index (CPI), with the next update covering March scheduled for release on April 10. Inflation has remained between 2.3% and 3% over the past year, down significantly from the 40-year high of 9% recorded in June 2022.

Analysts at Wells Fargo, in a report dated March 23, cautioned against drawing extreme conclusions from early data. The note recalled that tariffs proposed by the president last April were viewed by some as a guaranteed trigger for an economic recession that ultimately did not materialize. While analysts noted that the surge in crude oil prices will likely drive global consumer price inflation, they suggested that political and economic constraints would probably shorten the duration of the war. The note added that while the risk of extensive structural damage to Persian Gulf energy infrastructure remains, it is believed both sides would prefer not to destroy the resources that provide nearly all of the region’s revenue.

Concurrently, the Organisation for Economic Co-operation and Development (OECD) stated that the war in Iran will test the resilience of the global economy. An OECD report released March 26 forecasts that inflation in the US will average 4.2% in 2026, reflecting higher energy prices due to oil market disruptions. The report warned that a protracted conflict in the Middle East could trigger an even more severe price shock.

Recession risks grow

According to investment banking firm Macquarie Group, if the ceasefire fails to hold and the war continues into June, there is a 40% probability that oil could reach $200 per barrel. An increase of this magnitude could push consumer prices even higher, rattle markets, and drive an already fragile economy toward a recessionary cliff.

Daniil Manaenkov, an economist and US forecasting expert at the University of Michigan, stated that if oil prices remain between $150 and $200 per barrel for one or two months, a recession becomes highly probable.

Evidence suggests this breaking point could arrive sooner than anticipated. Consumers tend to alter spending habits when concerned about high prices or job security. Manaenkov noted that consumers are already dining out less, opting for cheaper store-brand products, and reducing travel. This decline in spending could slow growth and pull the economy closer to a recession.

The International Monetary Fund (IMF) echoed these concerns in a March 30 blog post, warning that a prolonged conflict could drive up prices and slow economic growth worldwide. IMF analysts noted that the duration of the war, its potential expansion across the Middle East, and the resulting damage to infrastructure and supply chains will determine the extent of economic devastation in the coming days, weeks, and months.

Key products and services facing price increases

Manaenkov noted that it can take six to 12 months for rising energy prices to fully filter through to all other consumer costs. While gasoline prices are high, the primary driver of overall cost increases is diesel fuel. Because the majority of freight transport relies on diesel, when those prices rise and remain elevated, almost every other sector follows.

Manaenkov described the process: “The timeline typically starts with an energy response, followed by an impact on shipping costs, then consumer products, and finally the services sector. While the impact on services is weaker than that seen in energy prices, it can still be quite significant.”

The areas likely to see price increases as a result of the war in Iran include:

All goods requiring diesel transport: Diesel fuel powers trucks, freight vehicles, construction equipment, agricultural machinery, and maritime vessels. As the cost of operating these vehicles rises, additional costs are added to all production materials and finished goods. According to AAA data, diesel prices have increased by approximately 50% since the start of the war, reaching $5.67 per gallon on Wednesday.

Air travel: Airlines operate on jet fuel, and costs have already risen sharply. In response, carriers have begun increasing ticket prices. Some companies are reportedly planning to cancel flights to save on fuel costs, which will increase competition for remaining seats and drive travel prices higher.

Food: Food production is facing multiple simultaneous pressure points from high prices. Beyond the diesel required for farm machinery and delivery trucks, fertilizers represent a major challenge. Nitrogen-based fertilizers require liquefied natural gas, while phosphate fertilizers—made from urea, ammonia, and sulfur—are critical for the production of staples such as wheat, corn, rice, and fruit. Approximately one-third of seaborne fertilizer passes through the Strait of Hormuz. If farmers cannot access affordable fertilizer now, they may be unable to plant sufficient crops during the spring season, eventually resulting in higher prices.

Plastics and packaging: Plastic production requires oil and natural gas. With approximately 85% of Middle Eastern polyethylene exports passing through the Strait of Hormuz, the price of raw materials for plastics is expected to rise. This affects water bottles, credit cards, furniture, household goods, food containers, automotive parts, and anything sealed or wrapped in plastic.

Synthetic clothing: Most modern apparel is produced from petrochemicals, including polyester, nylon, spandex, and fleece. The garment industry, particularly fast-fashion manufacturers, depends on synthetic fibers sourced through supply chains passing through the Strait of Hormuz. As raw material costs rise, fabric costs will follow, impacting garment prices.

Technology and electronics: This industry is facing dual disruptions. The Strait of Hormuz is a critical shipping route for graphite raw materials essential for lithium-ion battery production, while helium gas is required for semiconductors, fiber optics, and medical devices. Supply disruptions could increase the price of smartphones, laptops, electric vehicles, energy storage systems, and diagnostic medical equipment such as MRI machines.

All aluminum products: Gulf nations provide approximately 9% of the global aluminum supply. These countries also account for 21% of US unrefined aluminum imports and 13% of processed aluminum imports. Aluminum is a fundamental material for construction, vehicles, aircraft, power transmission, and appliances; export delays could raise the prices of construction products, industrial equipment, planes, and automobiles.

Automobiles: Increases in plastic and aluminum prices, combined with other supply chain disruptions, are likely to drive up vehicle costs. Manaenkov noted that production disruptions in South Korea or Japan could cause issues for US manufacturing, contributing to vehicle shortages and increasing prices for both new and used cars.

Vulnerability in oil flows

Even if the war concludes, shipping flows through the Strait of Hormuz may not return to normal immediately, and fuel prices in the US may not necessarily drop. Warnings persist that Iran could continue to exercise control over oil flows, keeping global and domestic fuel costs high. In other words, even if the US ends its intervention entirely, Iran retains the leverage to maintain economic pressure.

Manaenkov compared the situation to a plumbing system: “This is not like a faucet you just turn on and off. Once you stop pumping, you must expend significant resources to restart the flow.”

While the conflict is currently paused and traffic in the strait is slowly resuming, observers note that the war is far from over and unrest remains widespread across the Middle East.

On Wednesday, just hours after the temporary ceasefire with the US was established, an Iranian drone reportedly struck a pumping station on Saudi Arabia’s critical East-West pipeline. This pipeline, used to bypass the Strait of Hormuz, carries approximately 7 million barrels of crude oil per day from the Gulf to the Red Sea. The damage caused by the strike could further deepen the energy crisis.