Continued blockage of the Strait of Hormuz is pushing the global economy toward a severe inflation stress test. According to a global macro report released by UBS Group AG on April 13, if the strait disruption persists until the end of April, U.S. inflation could peak at 5%, a level that would sharply narrow the Federal Reserve’s policy response options and potentially disrupt the global economy’s fragile recovery from the 2025 tariff shocks.
This risk is compounded by extremely fragile inventory conditions. UBS pointed out that global crude oil and refined product inventories had fallen into the lower third of their historical range by the end of March and could hit record lows in April. European natural gas reserves are also nearing the dangerously low levels seen at the start of the Russia-Ukraine war in 2022. The median increase in global energy price inflation has reached a 25-year high, with supply-side buffers nearly exhausted.
More critically, this shock comes at a time when the U.S. economy is already under significant strain. Revised nonfarm payroll figures for 2025 show near-zero growth, while consumer and business confidence have fallen below Eurozone levels. Liquidity among the bottom half of U.S. income earners is nearly depleted—UBS emphasized that this group’s ability to withstand inflation shocks is far weaker than two to three years ago.
Historical trends suggest that interest rates tend to rise during oil price shocks. However, the Fed now faces a dilemma: tolerating rising inflation too much would further erode an already fragile consumption base, while raising interest rates could accelerate an economic slowdown already pressured by tariffs. UBS’s scenario analysis indicates that the central bank has few easy options this time.
Three Scenarios: Duration Determines Inflation Severity UBS’s oil team outlined three scenarios: pre-conflict baseline, two-month disruption, and prolonged disruption. Under the worst-case scenario—where the Strait of Hormuz remains blocked through April—U.S. inflation would peak at 5% in the second quarter.
Depending on timing, this energy disruption could rank among the largest recorded oil supply shocks. Global crude and refined product inventories had already dropped to the lower third of their historical range by late March and may hit absolute record lows in April, leaving the global economy with almost no inventory buffer to cushion the supply gap. European gas reserves are also near 2022 Russia-Ukraine conflict lows, further tightening energy security.
UBS also highlighted a second potential choke point beyond Hormuz, signaling that geopolitical risks to the global energy supply chain are not confined to a single node. Notably, there is no clear linear relationship between countries’ reliance on Middle Eastern oil and domestic pump prices, indicating that the pass-through mechanism of energy prices varies by country and is influenced by multiple factors.
Rising Vulnerability of Low-Income Groups, Reduced Shock Absorption This round of inflation is hitting the least resilient segment of the population. The liquidity of the bottom half of U.S. income earners is nearly exhausted, and their ability to absorb oil price shocks is significantly weaker than two to three years ago. The report noted that rising income inequality means the social cost of this inflation surge will fall disproportionately on low-income groups, with downward pressure on consumer spending not to be underestimated.
From a broader economic perspective, vulnerabilities are also evident. Excluding the tech sector, U.S. imports have fallen to their weakest levels since the COVID-19 pandemic and the global financial crisis. The actual pass-through of tariffs to domestic prices is about two-thirds of model estimates, and this inflationary pressure is still building. The additional shock from oil prices will further limit the room for overall inflation to decline.
Risks also exist in asset prices. A 25% drop in the S&P 500 would trigger household equity wealth losses comparable to those seen during the global financial crisis or the dot-com bubble burst. Given that U.S. household wealth is far more dependent on equity markets than in the Eurozone, the potential drag on consumer demand through this channel cannot be overlooked.
Central Bank Dilemma: Historical Patterns Not Directly Applicable Historical data offers some reference: during previous oil shocks, interest rates tended to rise, credit spreads remained relatively controlled, and the U.S. dollar generally weakened. UBS systematically reviewed the communication frameworks of the Fed and the European Central Bank following past oil shocks, as well as stock market performance patterns, to provide historical context for the current situation.
However, key differences exist this time. Global growth had been on a fragile recovery path from the 2025 tariff and uncertainty shocks, and this recovery remains highly vulnerable. At the same time, tariff uncertainty has already blurred the Fed’s policy signals, and a sudden surge in inflation will force it into a more difficult trade-off between stabilizing growth and controlling inflation. In the past response records of the Fed and the ECB, there is no precedent for a tariff shock coinciding with a large-scale energy supply disruption.
Europe’s direct exposure in this shock is relatively limited—UBS data show that Europe’s energy imports from the Middle East account for a relatively small share of total energy imports, differing significantly from major Asian economies, which somewhat reduces the immediate pressure on the ECB. Still, a systemic rise in global oil prices will transmit to the Eurozone through inflation expectations and trade channels, meaning the ECB cannot remain entirely insulated.
Comments