The Brief

U.S. crude oil has surged roughly 42 percent from pre-war levels since the U.S.-Israeli strikes on Iran began February 28, with West Texas Intermediate briefly touching $119 per barrel. EY-Parthenon chief economist Gregory Daco estimates March headline CPI could rise 0.9 percent month-over-month — the highest in four years — pushing annual inflation from 2.4 percent toward 3.3 percent as higher fuel costs cascade through supply chains.

The Report

Two weeks into the Iran conflict, the economic damage is arriving faster than most forecasters expected. With the Strait of Hormuz effectively closed to commercial traffic — removing roughly 20 percent of global oil and LNG supply from the market — crude benchmarks are hovering near $100 per barrel after a volatile fortnight that saw WTI spike to $119 on March 9 before retreating. U.S. gasoline has climbed to a national average of $3.58 per gallon, a 20 percent increase in under a month, with California stations posting prices above $5.

The supply shock is hitting an economy already showing signs of strain. February’s jobs report recorded 92,000 losses, the unemployment rate sits at 4.4 percent, and Q4 2025 GDP was revised down to 0.7 percent annualised on March 13. Daco’s EY-Parthenon team projects headline CPI will reach 3.3 percent in the spring, a figure he notes may understate the real picture — the 43-day government shutdown distorted data collection, and he estimates underlying inflation was already running closer to 2.8 percent before the war began.

The damage extends well beyond the pump. Diesel, which accounts for 50 to 60 percent of shipping operating costs, has jumped 28 percent. Urea fertiliser prices have risen 35 percent, with nearly half of global urea exports originating from Persian Gulf producers now cut off from their primary shipping route. FedEx has triggered a 24.25 percent fuel surcharge. Agricultural economists warn the full impact on grocery prices could take months to materialise — but the transmission mechanism is already in motion.

Wall Street’s concern has shifted from inflation alone to the compound problem of rising prices and weakening growth. At least six investment banks issued stagflation warnings in the past week. Deutsche Bank’s Jim Reid warned that “with each passing day it gets harder to argue that the disruption to shipping and energy infrastructure will only prove temporary.” Goldman Sachs raised its 12-month recession probability to 25 percent. Market veteran Ed Yardeni put the odds of 1970s-style stagflation at 35 percent.

The Federal Reserve, which meets March 18, is expected to hold rates steady at approximately 3.6 percent. Chicago Fed President Austan Goolsbee described simultaneous rising inflation and weakening employment as “the worst-case scenario for the central bank.” Moody’s chief economist Mark Zandi estimated the Fed will “sit on their hands” for two to three months while assessing which side of its dual mandate faces the greater threat. Daco went further, noting it is “entirely plausible that the Fed delivers no rate cuts in 2026.”

The IEA has authorised the release of 400 million barrels from strategic reserves — the largest coordinated drawdown in history — with the U.S. contributing 172 million barrels. But analysts caution the relief will take months to reach markets. Dan Pickering, founder of Pickering Energy Partners, was blunt: “Oil can’t come out fast enough to offset the closure of the straits.”

The Angle

The stagflation comparison to the 1970s is instructive, though not for the reasons most analysts are citing. The standard reassurance — that the U.S. is now the world’s largest oil producer, that the shale revolution changed the supply equation, that inflation was not already entrenched — is accurate as far as it goes. What it avoids is the more uncomfortable structural observation: the tool being deployed to manage this shock was not designed for it. Monetary policy adjusts the cost of money. It does not reopen shipping lanes, replace 15 million barrels per day of missing supply, or un-mine a strait. The entire debate about whether the Fed should hold, cut, or hike is a debate about how vigorously to turn a dial that is not connected to the problem.

The Fed knows this. Goolsbee’s “worst-case scenario” framing is not alarmism — it is a precise description of a central bank being asked to choose which failure it prefers. Raise rates and accelerate a labour market already shedding jobs. Cut rates and validate an inflationary spiral the war is driving regardless. Hold and watch both mandates deteriorate while appearing paralysed. Every option is a version of using demand-side tools on a supply-side event and hoping the mismatch doesn’t show.

What determines whether this becomes a temporary energy-price bump or a structural economic inflection is not a decision the Fed can make. It is a question about when ships move through the Strait of Hormuz again. The answer to that sits in Tehran and Washington, not in the Eccles Building — and the distance between “when I feel it in my bones” and a new Supreme Leader pledging to keep the strait closed indefinitely is the gap the global economy is currently falling through.