Where the crisis begins
Geopolitical tensions are driving oil prices to new highs, and the energy shock stemming from the conflict with Iran is systematically reshaping global inflation and monetary policy expectations.
According to estimates by Ziad Daoud, Chief Emerging Markets Economist at Bloomberg, geopolitical supply disruptions this year have already added $49 to oil prices, representing roughly half of the current price level.
Bloomberg forecasts that the surge in oil prices will push global inflation to 4.5% in the fourth quarter of 2026, far higher than the 3.1% projected for the same period in 2025. Simultaneously, market expectations for the Federal Reserve have shifted from rate cuts to rate hikes—current pricing indicates that the Fed is not only unlikely to cut rates but may even need to raise them by nearly two increments.
This shift delivers a direct blow to both consumers and investors: the dual pressure of rising living costs and higher borrowing costs is compounding. The Trump administration's initial strategy, which relied on cheap energy and loose monetary policy, has been thoroughly disrupted by this conflict.
The Strait of Hormuz blockade: A $49 supply shock
The United States and Iran have been exchanging strikes for 12 consecutive days.
Tehran is attempting to formalize its control over the Strait of Hormuz, while Washington is working to break the blockade. The result of this standoff has been the near-closure of the world's most critical energy shipping lane.
According to Bloomberg data, shipping traffic through the Strait of Hormuz, after a brief recovery in late June, has plunged once again, disrupting approximately 10% of the global oil supply. Meanwhile, the conflict has spread to the Red Sea, where Houthi militants have begun attacking Saudi tankers, threatening an alternative shipping route that carries around 5% of global crude flows.
With both key routes under simultaneous pressure, the global oil supply faces an unprecedented double bottleneck. Bloomberg estimates that these supply disruptions have collectively contributed $49 to this year's oil price increase.
Weaker demand provides some offset, but buffer room is limited
Weaker demand has partly acted as a shock absorber for wartime supply shortages. Bloomberg estimates that declining demand has placed roughly $10 of downward pressure on Brent crude prices in 2026.
Consumer responses are manifesting in two main ways: first, fuel substitution, shifting to alternative energy sources; and second, overall energy consumption cuts, with demand adjustments particularly noticeable in Asia. Additionally, inventory releases have partially filled supply gaps, using stored oil to replace missing spot supplies.
However, natural demand contraction and inventory buffers are ultimately insufficient to fully offset structural supply-side losses. As the supply shock continues to expand, the marginal effectiveness of this buffer mechanism is diminishing.
Inflation expectations repriced, rate cut window closes
This conflict has already caused significant damage to the global economy and fundamentally altered market expectations for the monetary policy path.
Before the war broke out, markets broadly anticipated that the Federal Reserve would begin a rate-cutting cycle. However, as rising oil prices have pushed inflation expectations higher, market pricing has shifted toward rate hikes—with the implied magnitude of increases now close to two increments. Consumers will face the dual pressure of higher living costs and elevated borrowing rates.
From a policy perspective, President Trump's return to the White House involved a clear pursuit of a combination of cheap energy and low interest rates. By the end of 2025, both falling oil prices and rate cut expectations seemed within reach. Yet, the outbreak of the Iran conflict has dashed both goals—a war initiated on his own terms has ultimately failed to deliver any of the economic dividends he had hoped for.
Comments