[One Month into the Iran War] 'Aftermath of High Oil Prices' Looms Even If War Ends... Stagflation Warning

Trump Announces Five-Day Suspension of Attacks
"Most Issues with Iran Have Been Agreed Upon"
Bleak Economic Outlook Even After End of War
Facility Restoration Expected to Take at Least 3 to 5 Years
Concerns Over Stagflation on the Rise

One month into the war with Iran (which began on the 28th of last month), U.S. President Donald Trump has declared a five-day pause in attacks on Iranian energy facilities. He also stated that the United States and Iran had reached agreement on most key issues. While Iran denied having negotiated with the United States, the markets responded positively to hopes for an end to the war. However, experts cautioned against premature optimism. They warned that the aftereffects of the war, namely 'high oil prices,' could cast a shadow over the global economy. If high oil prices drive inflation, central banks may raise their benchmark interest rates to curb prices, which could dampen economic activity and potentially lead to stagflation.

Cheering on Expectations of an End to the War...

U.S. President Donald Trump. Photo by Reuters Yonhap News

On the 23rd (local time), the New York stock market closed higher across the board on hopes for an end to the war. On the New York Stock Exchange (NYSE), the Dow Jones Industrial Average rose 1.38%, the S&P 500 index, which focuses on large-cap stocks, climbed 1.15%, and the technology-heavy Nasdaq index jumped 1.38%. International oil prices, however, plunged. West Texas Intermediate (WTI) crude ended the session down 10% at $88.13 per barrel, while Brent crude fell 11% to $99.94. During the session, Brent crude dropped as much as 13% and WTI as much as 12% at one point.

The trigger was a post by President Trump on the social media platform Truth Social around 7 a.m. that day. He wrote that the United States and Iran were in negotiations, and that attacks on Iranian power plants and energy facilities would be suspended for five days. Later, speaking to reporters, he stated that U.S. representatives, including Middle East envoy Steve Witkoff and Jared Kushner, had successfully negotiated with Iran’s top officials until the previous evening and that they had "reached agreement on nearly every issue," including Iran’s renunciation of nuclear weapons.

While the market reacted positively, some pointed out that it is too soon to say that expectations for an end to the war have truly grown. The U.S. final ultimatum deadline now appears to have been pushed back to the 27th. On the 21st, President Trump had posted on Truth Social that "unless the Strait of Hormuz is opened within 48 hours, we will devastate Iranian power plants."

Fatih Birol, Executive Director of the International Energy Agency (IEA), predicted that even if the United States and Iran succeed in reaching an agreement, the market will have to bear the scars of war for some time. In an interview with The New York Times (NYT) on this day, he said, "It will take time to return to normal conditions as before the war began." He explained that the war has reduced global oil supply by more than 11 million barrels per day (about 10%). This is a larger reduction than the combined daily supply decline during the oil shocks of 1973 and 1979 (10 million barrels). He also pointed out that the impact on natural gas supply has been even more severe. Qatar’s exports of liquefied natural gas (LNG) have dropped by about 17% due to the war. It is expected that it will take at least three to five years just to restore the facilities.

Some analysts suggested that President Trump’s detailed disclosure of the negotiation process on this day was intended to dispel such market concerns. Marco Papic, chief strategist at BCA Research, said, "If this issue is not resolved within the next 7 to 10 days, the global economy could be paralyzed in a manner similar to the pandemic," adding, "Today’s announcement indicates that President Trump is aware that the real economy could be pushed to the brink." Jordan Rochester, a fixed income strategist at Mizuho, commented, "It was a terrible day for anyone trying to manage risk," and pointed out, "The hardest part is not predicting the war itself, but forecasting the content of White House announcements and how the market will react to them."

Fed’s Dilemma Deepens, Stagflation Fears Rise

A prolonged period of high oil prices could have a profound effect on U.S. monetary policy. Gasoline prices are among the items that have the biggest influence on inflation expectations. Persistently high energy prices drive up inflation expectations, and if those expectations become unanchored, they can further increase actual inflation. Austan Goolsbee, President of the Federal Reserve Bank of Chicago, said in an interview with CNBC on this day, "Just before President Trump posted on social media, I was about to say on air that the outlook for a rate hike in December was becoming quite clear," adding, "Right now, price stability should take precedence over employment." He further remarked, "If the shock of rising oil prices is added to already entrenched inflation above the target level, it could create a very dangerous situation."

According to CME Group’s FedWatch, the probability that the Federal Reserve will raise its benchmark interest rate by 0.25 percentage points in October now stands at 14.3%. A week ago, this probability was 0%. Such concerns were also visible during the latest Federal Open Market Committee (FOMC) meeting. This month’s FOMC saw a worsening outlook for short-term inflation. The Fed now expects personal consumption expenditures (PCE) inflation to reach 2.7% by the end of this year, higher than the 2.5% it had projected at the end of last year.

The view that stagflation is looming is gaining traction. Katherine Rooney Vera, chief market strategist at StoneX Group, warned, "The market has started to price in the impact of stagflation, which could appear soon," adding, "The longer the conflict drags on, the higher oil prices could climb."

Bloomberg also pointed out that the effects of tariffs have lasted longer than expected and that, if the war with Iran drags on and energy prices rise further, there is a strong likelihood that inflation will remain elevated throughout the year.

This content was produced with the assistance of AI translation services.