US Stock Market: Prolonged conflict could lift US inflation sharply

Escalating tensions in the Middle East and prolonged disruption to global oil flows are emerging as a major risk to the U.S. inflation outlook, with new research suggesting price pressures could rise sharply if the conflict persists, according to a Reuters report citing a Federal Reserve Bank of Dallas working paper.

The study highlights that a sustained disruption in oil shipments—particularly through the strategically critical Strait of Hormuz—could drive U.S. headline inflation well above 4% by the end of the year. The findings come at a time when global markets are reacting to fast-moving geopolitical developments, including recent threats of escalation involving Iran and the United States, and uncertainty over the reopening of key oil transit routes.

According to Reuters, the Strait of Hormuz, which accounts for roughly a fifth of global oil flows, has already faced significant disruption in recent weeks amid heightened military tensions. While there have been intermittent diplomatic signals suggesting temporary de-escalation, the situation remains fragile, with energy markets highly sensitive to any further developments.


The Dallas Fed paper outlines multiple scenarios based on the duration of supply disruption. A short-term closure lasting about a quarter could trigger a sharp but temporary spike in inflation, with annualized increases surging in the near term before moderating. However, a prolonged disruption stretching up to nine months could have a more lasting impact, pushing oil prices as high as $167 per barrel and lifting year-end inflation by as much as 1.8 percentage points.

This poses a direct challenge to the Federal Reserve’s efforts to bring inflation back toward its 2% target. U.S. inflation, as measured by the Personal Consumption Expenditures index, was last recorded at 2.8% in January, already above the central bank’s goal. A sustained rise in energy prices—particularly gasoline—could reverse recent progress made in cooling inflation.

Reuters notes that policymakers are particularly concerned about the “second-round effects” of rising inflation. Higher fuel costs not only impact household spending directly but can also feed into broader wage and pricing decisions across the economy, potentially entrenching inflation at elevated levels.

The research suggests that while headline inflation could rise significantly, the impact on core inflation—which excludes food and energy—would be more moderate. Even in a prolonged disruption scenario, core inflation is expected to increase by less than half a percentage point.

Encouragingly for policymakers, the study finds that long-term inflation expectations are likely to remain relatively stable. While short-term expectations among households could rise modestly, longer-term expectations—seen as a key anchor for monetary policy—are expected to show only minimal movement.

Still, the evolving geopolitical situation continues to inject uncertainty into the outlook. Markets have recently seen sharp swings in oil prices, bonds, and equities in response to headlines around ceasefire discussions and potential reopening of shipping routes. Any renewed escalation or extended blockade of the Strait of Hormuz could amplify these risks further.

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The findings provide important context for Federal Reserve officials as they assess the economic fallout from the Iran conflict. With inflation risks tilting upward again due to external shocks, the central bank may face a more complex policy path in the months ahead, balancing growth concerns with the need to contain price pressures.

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