As Trump declares inflation tamed, Iran conflict threatens new price pressures

Just as President Donald Trump has been insisting that inflation is on the run, the war involving Iran threatens another price spike that could undermine his central case for lower interest rates.

Oil prices jumped overnight as markets reacted to the escalation in the region, following a joint U.S.-Israel strike. West Texas Intermediate futures rose more than 5% while Brent crude futures gained about 6%, both off their overnight highs but still sharply elevated.

The increase in oil prices adds another layer to recent indicators that, while inflation is well off its highs of a few years ago, underlying price pressures remain. Historically, surges in energy costs have often preceded broader inflation increases.

Generally speaking, “war has proven to be ‘inflationary,’ as it is associated with negative supply shocks,” wrote Thierry Wizman, global FX and rates strategist at Macquarie Group. “Indeed, even before the new U.S.-Iran war, oil prices were higher on hoarding, and since hostilities began, prices are being pushed up by higher insurance premiums and forced re-routing of maritime shipping.”

There also have been signs outside of energy markets that inflation pressures may be firming.

January’s producer price index, a measure of wholesale costs and a proxy for pipeline inflation, rose a stronger-than-expected 0.8% excluding food and energy. That pushed the 12-month rate to 3.6%, still well above the Federal Reserve’s 2% target.

In addition, the Institute for Supply Management reported Monday that its manufacturing prices index showed that more than 70% of managers reported higher prices in February, an 11.5 percentage point jump from a month earlier.

Even so, most economists say the impact from higher oil prices is difficult to gauge and could ultimately prove temporary, as has often been the case with past Middle East conflicts.

Economists say the duration of the war will be critical. Prolonged disruptions to shipping routes, higher insurance costs and supply chain rerouting could amplify inflationary pressures beyond the direct effect of higher gasoline prices.

“It is unclear at this time whether the price increase is sustainable over the medium term because the conflict is still in its early stages,” said Ravikanth Rai, associate managing director for energy and natural resources at Morningstar. “It is difficult to determine if there will be a structural impact on oil and gas supply coming out of the region.”

Moreover, with the U.S. producing a larger share of its own energy, the broader economic impact of oil price spikes is not what it once was.

“In today’s American economy, spikes in oil prices do not present the same significant downside risk to top-line economic growth or inflation as they did a half century ago,” said Joseph Brusuelas, chief economist at RSM. “The American economy is far less exposed to economic and inflation disruptions while its overall size has tripled.”

By one estimate, a $10 increase in oil prices would translate to roughly a 0.2 percentage point rise in inflation and a 0.1 percentage point drag on economic growth. With the current move in crude falling short of that threshold, the near-term economic impact is expected to be modest.

Still, crosscurrents remain. The U.S. labor market has shown signs of softening, while the outlook for tariffs and fiscal policy remains uncertain, adding to an economic picture that has been resilient but showed signs of cooling toward the end of 2025.

Some economists warn of stagflation risks, in which higher prices coincide with slower growth.

“Given that growth in most regions is still recovering from pandemic, trade and geopolitical tensions, stagflation risks may reemerge depending on how long Middle East tensions last,” said Ipek Ozkardeskaya, senior analyst at Swissquote.

Together, the developments suggest inflation may be facing renewed pressure from both geopolitical shocks and underlying cost trends, complicating what had been a gradual return toward the Fed’s 2% goal.

Markets on Monday increased bets that the central bank will remain on hold at its March meeting and potentially into the summer, as officials weigh the competing forces of higher energy prices and uneven growth.

“While this conflict heightens stagflationary risks for the global economy, it is unfolding against a backdrop of favorable growth-policy mix and resilient earnings,” said Emmanuel Cau, head of European equity strategy at Barclays.

Cau added that if the conflict ultimately leads to greater regional stability, it could even prove “oil negative/growth positive in the medium term.”

All of that means the “rise in oil prices will of course receive attention from” the Fed, wrote Citigroup economist Andrew Hollenhorst. “But movements in commodity prices, especially if short lived, are typically ‘looked through’ by Fed officials, and may be modest in any case.”