By Randall W. Forsyth
Watching TV news or listening to most consumers, you'd think the jump in oil prices since the start of the Iran war will send inflation spiraling skyward.
Most economists, meanwhile, expect that the impact of higher energy costs on inflation will be relatively trivial. Some even invoke the infamous T word: "transitory."
The truth probably lies somewhere in the middle, even after crude's 10% selloff on Friday on news that Iran said it would reopen the Strait of Hormuz . Inflation won't skyrocket, as it did in 2022 to a four-decade peak north of 9%. But the surge in oil, to a recent $81.50 per barrel from a prewar $65, will prevent inflation from making progress in coming down to the Federal Reserve's 2% annual target, even after taking out nettlesome food and energy prices.
That will keep the central bank's monetary policy on hold for the months ahead and possibly well into 2027. Even the most strident voices that had been calling for interest-rate cuts now say a wait-and-see stance is preferable, given the ever-changing prospects for ending the conflict with Iran.
Economists' projections for the war's inflationary impact depend importantly on how soon oil and other key goods resume moving through the chokepoint of Hormuz. While Iran has declared the strait open, President Donald Trump has said a U.S. blockade of Hormuz is still in place.
The war could lead to little more than a rounding error if the strait reopens soon, according to a new paper from the Dallas Fed. But if traffic remains blocked for up to nine months, the bank's economists estimate that the personal consumption expenditures price index, the Fed's preferred inflation gauge, could be rise nearly 1.5 percentage points, a significant increase from the PCE's 2.8% year-over-year increase in January.
For Americans already burdened by high prices, $4-plus-a-gallon gasoline screams inflation. They reacted by sending the University of Michigan's early-April Index of Consumer Sentiment sliding to a record low, with every demographic cohort of age, income, and political preference sounding downbeat. Almost all of the responses came before the April 7 temporary cease-fire announcement, UMich noted, saying that consumers will probably regain confidence once supply disruptions from the war have ended.
Economists' forecasts of the inflation impact similarly depend on when shipments resume and oil prices ease.
Morgan Stanley economists estimate that a 10% rise in oil prices resulting from a supply shock would raise the core consumer price index (excluding food and energy) by just three basis points, or three hundredths of a percentage point. That assumes the supply shock is temporary, at about three months. A longer disruption with a more persistent rise in oil that results in higher inflation expectations might differ significantly from its modeled results, they added.
The overall CPI would be boosted by 35 basis points, they wrote in a research note this past week. (A basis point is a hundredth of a percentage point.) Much of the impact on service costs would be felt in higher airfares, which is obvious to anybody who has booked a flight lately.
Front-month West Texas Intermediate crude, the U.S. benchmark, which traded in the mid-$60-a-barrel range before the bombing of Iran started on Feb. 28, on Thursday settled at $94.69, a 40% increase but down from recent peak settlement of $112.95 on April 7. On Friday, WTI plunged all the way to about $84 after Iran said traffic through the Strait of Hormuz had resumed.
Most analysts and the futures market foresee a significant reversal of oil's war-related price spike. Alpine Macro's chief U.S. strategist and director of research, David Abramson, sees Brent crude (the global standard, which typically trades a few bucks above WTI) settling back in the $70-to-$80 range in the next few months once it becomes clear that hostilities will ease.
The war also weighed on business activity in March, when information was gathered for the beige book prepared for the April 28-29 Federal Open Market Committee meeting, wrote Carl Weinberg, chief economist at High Frequency Economics, in a client note. The Middle East conflict replaced tariffs as a major source of uncertainty, resulting in many firms taking a wait-and-see attitude about hiring, pricing, and capital spending, he noted.
How much higher costs get passed on will depend the strength of the economy. If growth proves more resilient than in prior such episodes and shelter inflation fails to slow further, Morgan Stanley thinks the pass-through to core CPI could be greater than its baseline estimate.
Deutsche Bank's economists see the U.S. economy probably weathering a "substantial shock relatively well." They tweaked their forecast for slightly weaker real growth in gross domestic product of 2.3%, measured from fourth quarter to fourth quarter. Core CPI is revised 0.5 percentage point higher, to 2.7%, while core PCE is revised up 0.1 point, to 2.9%, they wrote in a research note this past week. The unemployment rate is seen remaining around current levels.
Despite the depressed UMich sentiment readings, Deutsche Bank economists see the oil impact being offset by an array of positives: supportive financial conditions; fiscal policy, featuring larger tax refunds; "robust" productivity; and continued strong investments in artificial intelligence.
All of which points to the Fed remaining on an "indefinite hold," which squares with the futures market. The CME FedWatch tool on Friday showed the federal-funds target range remaining stuck at 3.50% to 3.75% all the way through April 2027.
The events of the past 10 days show how dramatically the backdrop can change. The stock market has soared on the prospects for easing energy costs. Consumers still are paying up at the pump. The Fed will stand pat to see how it all sorts out.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 17, 2026 16:27 ET (20:27 GMT)
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