The outlook for the global economy has darkened again in recent days. The escalation of the conflict between the United States, Israel and Iran has revived a scenario investors had long considered more of a historical memory than a real risk: stagflation. The combination of high inflation and weak economic growth that paralyzed the global economy in the 1970s is now being recalled amid rapidly rising energy prices and growing geopolitical uncertainty.
The situation intensified after Iran effectively closed the Strait of Hormuz — a key maritime route through which roughly 20% of global oil supplies pass. As reports of disrupted energy flows began to emerge, economists started warning about possible consequences for inflation, economic growth and financial markets.
“The US economy is now facing a second stagflation-like shock within a year,” said Sal Guatieri, chief economist at BMO Capital Markets. According to him, war could increase inflation, disrupt energy supply chains and weaken investor and business confidence.
What stagflation is and why it is dangerous
Stagflation refers to a situation in which an economy faces high inflation, stagnant growth and often rising unemployment at the same time. This combination is particularly problematic for policymakers.
Under normal circumstances, central banks respond to high inflation by raising interest rates to cool demand. However, if the economy is weak and the labor market is slowing, higher rates can deepen the downturn.
These dilemmas dominated economic policy in the 1970s, when oil shocks caused by geopolitical conflicts triggered a surge in energy prices. Inflation in some countries reached double-digit levels while economies slid into recession.
Some economists say the current situation resembles those historical parallels.
Read also: US stocks decline as dollar strengthens amid Middle East conflict escalation
Oil as the trigger of an economic shock
Energy markets are extremely sensitive to geopolitical conflicts. Whenever the risk of supply disruptions appears, oil prices usually respond with a sharp rise.
That has an immediate impact on the entire economy.
Oil affects not only fuel prices but also transportation, manufacturing and logistics costs. Higher energy prices therefore gradually feed into broader inflation.
Analysts at Pantheon Macroeconomics expect the average price of gasoline in the US could rise from about $3 to $4 per gallon.
“Drivers will soon be paying four dollars per gallon for gasoline, which will reduce their real disposable income,” said Samuel Tombs, the company’s chief US economist.
Higher energy prices also affect businesses. Rising costs can slow investment and reduce demand across the economy.
The Fed may face an uncomfortable dilemma
The risk of stagflation could significantly complicate decisions at the US central bank. The Federal Reserve has a dual mandate: maintaining stable prices and low unemployment.
If inflation rises again due to an energy shock, the Fed should theoretically keep interest rates high. But if the economy and labor market weaken at the same time, the central bank might need to cut rates to support growth.
According to Daniela Hathorn, analyst at Capital.com, disagreements among Fed officials could deepen.
“Some may argue for supporting a weakening labor market, while others will warn against repeating the mistakes of the past by easing policy too early,” she said. The result could be a divided Fed and higher market volatility.
Read also: Oil prices fall after April US unemployment report
Why today may not repeat the 1970s
Despite the similarities, many economists point out key differences.
According to analysts at Deutsche Bank, the United States is now a major oil producer, reducing its dependence on imports. That means the energy shock might not be as severe as during the oil crises of the 1970s.
Another difference is inflation expectations. Consumers today generally believe inflation will remain relatively low in the long run. That reduces the risk of a wage-price spiral that contributed to persistent inflation in the 1970s.
“Whether history repeats itself will depend largely on how long the conflict lasts,” said Jim Reid, head of global macro research at Deutsche Bank.
What financial markets are watching
Financial markets are not yet pricing in a prolonged energy shock. Futures contracts suggest oil prices could hover around $75 per barrel in 12 months, signaling expectations of relative stabilization.
Analysts at Oxford Economics therefore have not significantly revised their macroeconomic forecasts.
According to chief economist John Canavan, the impact on US GDP and inflation should remain relatively modest if the conflict stays limited and short-lived. In such a scenario, the S&P 500 index could resume growth once the conflict ends.
Three possible scenarios
The future of the global economy will largely depend on the duration and intensity of the conflict.
1. Rapid de-escalation
If military operations end quickly, oil prices would likely fall and the economic impact would remain limited. President Donald Trump suggested such a scenario when he said higher oil prices were “a small price to pay for eliminating Iran’s nuclear threat.”
2. Long-term energy shock
If oil supply disruptions persist, inflation could accelerate again. That would increase pressure on central banks and slow global economic growth.
3. Geopolitical escalation
The most dangerous scenario would be a wider regional war threatening energy supplies from across the Middle East. In that case, oil prices, bond yields and stock market volatility could surge.
Sources:
https://finance.yahoo.com/news/mideast-war-risks-sending-global-165936639.html
https://www.cfodive.com/news/surging-oil-price-spurs-worries-stagflation-lengthy-iran-war-Fed-Federal-Reserve/814236/
https://www.theguardian.com/us-news/2026/mar/09/california-gas-prices-iran-war
https://www.reuters.com/business/energy/consequences-global-oil-markets-could-be-catastrophic-if-hormuz-closure-2026-03-10/
