Will the Iran Conflict Trigger a Pandemic-Style Inflation Spike?

No, we do not think this is the likely outcome. While the path forward is highly uncertain, several key factors—including the typically limited pass-through of energy price increases to broader inflation, the possibility that the conflict remains short-lived, and the unique circumstances behind the 2021–22 inflation surge—suggest that a repeat of pandemic-era inflation is unlikely. Nonetheless, if the conflict were to drag on, the risk of a significant inflation spike would rise, even if we do not see this as the most likely scenario or expect it would approach the scale of the pandemic episode.

The coordinated attacks on Iran by the United States and Israel, which began on Saturday, February 28, have jolted markets, with the clearest effects showing up first in energy. Tanker traffic through the Strait of Hormuz, a critical passage for about 20% of global oil and liquefied natural gas (LNG) supply, has dropped sharply. At the same time, production across the region, including in Iran, Kuwait, Iraq, Saudi Arabia, the United Arab Emirates, and Qatar, has also been disrupted. Because oil demand is relatively insensitive to price in the short run, even modest supply losses can push crude prices meaningfully higher. That dynamic helped drive front-month ICE Brent futures up 46% from when the conflict began to $106 per barrel in trading today, prompting G7 countries to consider releasing petroleum from their strategic reserves and renewing concerns about inflation.

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