The Iran war will cause inflation to surge | The Economist

TL;DR

A war blocking the Strait of Hormuz is driving oil prices up 50%, threatening a wage-price spiral and 2 extra percentage points of global inflation.

Key Points

• 1.Oil shocks ripple through virtually every sector of the economy. Energy is an input for heating homes, running factories, and transporting goods — meaning an oil price spike raises costs for businesses and consumers across the board, eventually feeding into wages.
• 2.Fertilizer trapped in the Strait of Hormuz poses a direct food inflation risk. Natural gas, urea, and sulfate fertilizers all pass through the strait; a shortage would trigger food supply shortfalls, with forward-looking traders already driving prices up in anticipation.
• 3.The wage-price spiral is the most dangerous second-order effect. When consumers see broad price rises, they demand higher wages; those higher wages become higher costs for businesses, pushing prices up further — a self-reinforcing loop that is very hard to stop once embedded.
• 4.The IMF rule of thumb implies a 2 percentage point rise in global inflation. For every 10% sustained oil price increase, global inflation rises ~0.4 points; with oil up ~50% since the war started, that implies roughly 2 extra percentage points, all else being equal.
• 5.Central bankers face a painful tug-of-war between fighting inflation and political pressure. After moving too slowly in 2022, they risk repeating that mistake, but new Fed Chair Kevin Walsh was appointed with Trump's expectation of lower rates — making aggressive rate hikes politically treacherous.