Central bankers and economists have warned that the US-Israel attack on Iran could trigger an inflation shock, potentially keeping UK inflation at 3% until the end of the year. Oxford Economics forecasts that inflation in the UK and eurozone could be 0.5 to 0.6 percentage points higher than previously expected due to prolonged conflict.
Oil prices have spiked despite US President Donald Trump's pledge to protect tankers through the Strait of Hormuz, through which about 20% of global oil supply passes. Bloomberg Economics estimates that a 1% drop in supply pushes oil prices up by 4%, suggesting a closure of the strait over a few months could raise prices by 80% from pre-war levels, to about $108 a barrel.
International Monetary Fund managing director Kristalina Georgieva said a 10% increase in energy prices persisting for a year would push up global inflation by 40 basis points and slow growth by 0.1-0.2%. UK inflation stood at 3% in January, while eurozone inflation was 1.9% in February.
Former Goldman Sachs economist Lord Jim O'Neill warned that the White House appeared to have given little consideration to the geopolitical impact of its actions. He noted that Gulf states may view the US as an unreliable partner and be drawn towards China, India and Brazil. Iran has retaliated by bombing Kuwait, Dubai, Saudi Arabia and Azerbaijan, targeting infrastructure sites including airports, oil refineries and gas plants.
In the US, consumers have already felt the impact, with a 17% rise in Brent crude prices feeding into fuel station prices. Since last Saturday, prices at the pump have jumped by 15 cents a gallon on average, according to GasBuddy. US inflation forecasts remain unchanged at 2.2% growth this year, as higher wholesale energy costs are offset by gains to US fracking companies.
