As the conflict involving Iran in the Middle East enters its third month and international oil prices reach their highest point since 2022, risks of "stagflation"—a toxic mix of slowing economic growth and high inflation—are rapidly accumulating. The Strait of Hormuz remains effectively shut down due to a joint U.S.-Iran blockade, extending what has become the largest disruption to global energy supplies in history. Financial markets are finding it increasingly difficult to ignore the economic costs driven by the escalating conflict.
Now two months in, this geopolitical clash threatens to saddle the global economy with stagflation. Even as tech stocks push equity markets higher, veteran Wall Street analysts continue to warn that the longer the Strait of Hormuz remains closed, the greater the risk of stagflation—or even recession—for energy-importing regions.
Mike Bell, Head of Market Strategy at RBC BlueBay, stated, "The probability of stagflation and recession in Europe, the UK, and parts of Asia is significantly higher than what is currently priced into equity markets."
Global benchmark crude surged more than 5% during early Asian trading on Thursday, reaching its highest intraday level since June 2022 and breaking above $124 per barrel. West Texas Intermediate (WTI), the North American benchmark, approached $109.
According to Axios, as negotiations to reopen the critical Strait of Hormuz have stalled, U.S. President Trump is scheduled to receive a briefing from Admiral Brad Cooper of U.S. Central Command on potential new military strike options against Iran. Media reports citing informed sources indicate that U.S. Central Command has requested the deployment of the Army's developmental "Dark Eagle" long-range hypersonic missile to the Middle East, intended for striking deep targets within Iran if necessary. If approved, this would mark the first operational deployment of a U.S. hypersonic weapon, a program long delayed and not yet declared fully operational.
The U.S.-Iran blockade of the Strait of Hormuz has reduced daily transit volumes to near zero. The International Energy Agency has described the current Middle East geopolitical conflict surrounding the Strait of Hormuz as the largest energy supply disruption in history. Commodities trading giant Vitol Group recently indicated that markets are facing a supply loss of approximately 1 billion barrels.
Brent crude futures have soared over 60% since the full-scale outbreak of the Iran conflict in late February, now stabilizing persistently near $110 per barrel. This is no longer a temporary spike but suggests that high oil prices may pose a sustained major threat, a reality that investors, central bankers, and corporate leaders must now confront.
Barclays recently cautioned that markets should not become overly optimistic about temporary ceasefire developments, as the U.S. and Iran remain far from a genuine peace agreement. Extensions of ceasefire arrangements have not led to any meaningful recovery in oil and gas shipments through the Strait of Hormuz. Barclays emphasized that the ongoing disruption continues to harm global energy markets, and equity and futures markets have not fully priced in this shock.
The true determinant of oil price trends may no longer be brief pauses in fighting, but rather the broader "post-conflict repricing" of the entire energy chain—including maritime insurance, tanker capacity, refinery repairs, and inventory rebuilding—all closely tied to shipping conditions in the Strait of Hormuz.
Besides Kuwait, Iraq, Qatar, the UAE, and Saudi Arabia are also suffering to varying degrees from the Hormuz closure, inventory build-ups, and damage to ports and energy infrastructure.
Analysts at Macquarie noted in a report that if the Middle East conflict persists through the end of the second quarter, oil prices could climb to $200 per barrel.
Here is how stagflation risks are materializing across key markets:
**Oil Prices Remain in Focus** Oil trading prices remain one of the most critical barometers of the global economy. Brent futures surged to $125 per barrel, over 60% above pre-conflict levels, and continue to rise as the war drags on. High energy prices threaten growth by squeezing consumers and businesses while significantly boosting inflation.
Citigroup is considering a severe scenario where Brent averages $120 through year-end, potentially reducing global growth to between 1.5% and 2%, with overall inflation nearing 5%. European and Asian natural gas futures have spiked over 80%. Farmers face a second round of fertilizer price surges in four years, and countries like Sweden have warned of potential long-term jet fuel shortages.
**Financial Conditions** Although borrowing costs linked to 10-year government bond yields have risen sharply, this shock has not yet been fully reflected in overall financial conditions. A closely watched Goldman Sachs index, which tracks how asset prices affect financing availability and future growth, tightened in March to its most restrictive level since last spring in the U.S., but has since stabilized, supported by a global equity rally since April.
Financial conditions in the Eurozone and Japan have tightened modestly, driven mainly by higher borrowing costs. The UK stands out with significantly tighter conditions, pointing to heavier growth impacts.
**U.S. Economic Impact** The impact varies by region depending on exposure to energy flows through the Strait of Hormuz. In the U.S., now the world's top oil exporter, gasoline prices remain slightly below pre-conflict levels. Mohit Kumar, Chief European Economist at Jefferies, noted, "The scale and nature of stagflation shocks differ across regions. U.S. inflation will remain elevated, but this is due to higher international oil prices rather than supply disruptions; the growth impact is much smaller in the U.S. than in Europe."
U.S. business activity rebounded in April, even as output prices jumped. Consumer expectations for one-year inflation rose sharply this month to 4.7% from 3.8% in March, and market-based measures have also moved higher. JPMorgan Chase CEO Jamie Dimon stated this week that the worst-case stagflation scenario for the U.S. economy remains possible.
**Europe's Difficult Position** Europe's reliance on energy imports makes it particularly vulnerable, with data already pointing to stagflationary macroeconomic shocks. A key data release on Thursday is expected to show Eurozone inflation near 3%. Contracting business activity, tighter bank lending standards, and soaring inflation expectations all indicate rising risks of stagflation or recession in Europe.
Germany's IMK economic institute raised the probability of the Eurozone's largest economy entering a recession in Q2 to 34%, up from 12% in March. Carsten Brzeski, Global Head of Macro at ING, suggested that another month of Strait of Hormuz disruption could trigger at least a technical recession in the Eurozone.
UK business activity has held up relatively well so far, but risks are mounting. The IMF delivered the largest growth downgrade among advanced economies to the UK. Reflecting severe inflation concerns, traders are betting on higher future benchmark interest rates in the UK and Eurozone, with borrowing costs rising faster in Europe. The UK two-year government bond yield has increased 90 basis points since the conflict began.
Equity markets, more focused on macroeconomic backdrop and future growth expectations, have seen Eurozone stocks fall 4% and UK stocks drop 5%, while U.S. and South Korean markets have rallied significantly.
**Asia Hard Hit** Asia, which typically receives about 80% of Gulf oil exports and 90% of liquefied natural gas shipments, is bearing the brunt. Parts of South and Southeast Asia already face energy shortages. Foreign investors are withdrawing heavily from Thailand; the Philippines is among the hardest hit by high oil prices and supply shortages; and Indian firms may confront persistent energy and power system disruptions.
Elsewhere, the Bank of Japan significantly raised its inflation forecast, signaling a potential rate hike cycle restart at its June policy meeting.
**China as a Notable Exception** Supported by ample oil reserves and a diversified energy structure, China's economy grew 5% in the first quarter. International investors are betting on Chinese battery and electric vehicle firms, as well as efficiently supplied solar and other renewables within China. Relatively low inflation has also helped Chinese bonds rally while other markets declined.
**Strait of Hormuz is Key** Stagflation risks are clearly resurgent, but their impact is uneven: energy-importing economies face stagflation, the U.S. confronts resurgent inflation pressures, and China enjoys a relative buffer. The most critical macroeconomic variable remains international oil prices, entirely linked to shipping conditions in the Strait of Hormuz.
As the Iran conflict enters its third month, the prolonged closure of the Strait is extending the largest energy supply disruption in history. Meanwhile, the latest oil price reports show Brent breaking above $120, hitting its highest level since 2022.
High oil prices simultaneously reduce real incomes, squeeze corporate profit margins, raise costs for transport, fertilizers, and jet fuel, and lift inflation expectations—a classic stagflation transmission chain.
Regionally, Europe, the UK, and parts of Asia are most at risk. Europe's import dependence, contracting business activity, tighter lending, and rising inflation expectations are clear threats. Asia's heavy reliance on Gulf energy makes it susceptible to imported inflation, fuel shortages, and capital outflows.
In contrast, the U.S., with greater energy self-sufficiency, faces a smaller growth impact but rising inflation expectations. What global investors fear most is not a one-day oil price spike, but persistently high prices that force central banks to keep rates high, compress corporate margins, and erode consumer demand—creating a triple squeeze of high inflation, low growth, and high rates.
While AI-driven capital expenditure continues to support global equity market risk appetite, the energy shock represents the biggest macro stress test for this AI-fueled bull market. If Brent remains above $110–$120 long-term, markets will have to shift from short-term bets on the war's end or ignoring geopolitical "noise," to repricing European/Asian recession risks, more hawkish central bank reactions, and higher global equity discount rates.
Notably, bonds, energy prices, and European financial assets are already reflecting a grimmer mix: the longer oil prices stay near historical highs, the harder it is for central banks to cut rates, the more economies suffer from high costs, and the greater the pressure on the AI-driven equity bull market from higher discount rates and margin compression.
Comments