War Is On, Oil is Up, Inflation is Coming

Wars always expose economic weaknesses that already exist. And now, as old patterns repeat themselves, we’re seeing higher energy prices, larger government deficits, and rising inflation catalyzed by the US campaign against Iran.

The developing situation inIran has already sent shockwaves through global energy markets, pushing oil prices sharply higher and reigniting fears of inflation. But inflation was already baked into the system. The war is simply accelerating the trends that were already underway.

Oil prices have surged past $100 per barrel for the first time since the early stages of the Ukraine war. Brent crude briefly approached $120 before pulling back, reflecting an unfurling of fear and uncertainty about how the conflict may unfold.

Crude Oil, 1-Year

That volatility is no surprise, as markets struggle to price the risk that key shipping lanes or production facilities could be disrupted. Roughly one-fifth of global oil supply moves through the Strait of Hormuz, making it one of the most critical chokepoints in the world economy, and a huge question mark in terms of how the conflict in the Middle East will progress. 

Any threat to that route, like a major war in the Middle East, can send energy prices soaring overnight, as it already has. A prolonged conflict could create another energy shock similar to the oil crises of the 1970s. But oil is only the beginning. Beyond oil itself, energy is embedded into nearly every stage of modern production. When transportation, manufacturing costs, and fertilizer become more expensive, food prices rise. 

Even plastics, electronics, and pharmaceuticals depend heavily on petroleum-based inputs. In other words, in all of modern life, we depend on oil. Meanwhile, we’ll have to keep printing money to keep the bombs dropping. That’s why economists often treat oil shocks as inflation multipliers, and when those shocks are caused by war, the effect is amplified.

Persistent increases in oil prices tend to translate quickly into broader consumer price inflation. One estimate suggests that every sustained $10 increase in oil prices can add roughly 20 basis points to global inflation. Now, we are seeing the early stages of that process. U.S. gasoline prices have risen sharply since the conflict began, climbing dramatically in a matter of days.

At the same time, inflation had already proven stubborn before the war started. Price pressures were still elevated even before energy costs surged again following the attacks on Iran. Inflation was never defeated, it was just waiting for a catalyst that has now definitively arrived.

As Peter Schiff recently said in his interview with Glenn Diesen:

“We already had inflationary pressures building. Now they’re going to build even more.”

Political explanations are guaranteed to ignore the real cause of inflation: central bank money printing to finance years of excessive government spending. Political leaders often use war as a convenient scapegoat for price increases that were already building due to monetary policy. Wars are expensive. Governments rarely pay for them honestly through taxation. Instead, they finance them through deficits, borrowing, and central bank intervention.

That ultimately leads to currency debasement and an inflation crisis for the US dollar. Military conflicts often lead to larger government deficits and increased money printing, which push prices even higher over time.

One of the most concerning developments is the return of stagflation. Stagflation describes the toxic combination of rising prices and slowing economic growth. It was the defining economic problem of the 1970s, when energy shocks drove inflation higher while economic activity weakened. Today’s conditions are beginning to look uncomfortably familiar. The current oil surge is worsening our existing stagflation scenario, which will only get worse if the conflict drags on and energy supplies remain constrained.

Higher oil prices act like a tax on the entire global economy. Consumers spend more on fuel and energy, leaving less money available for other goods and services. Businesses face higher operating costs, which compress profits and slow investment.

Meanwhile, central banks face an impossible dilemma. If they raise interest rates to fight inflation, they risk pushing already fragile economies into recession. But if they keep monetary policy loose to support an illusion of growth, inflation will accelerate even further.

That policy trap is one of the defining features of stagflation, and one of many ways that the Fed always backs itself into a corner. The real consequences of conflict like higher oil prices, larger deficits, and stickier inflation, often take time to fully appear in markets.

The current oil spike may fade temporarily if the conflict stabilizes. Strategic petroleum reserve releases or diplomatic developments could ease prices in the short term. But the combination of war, rising energy prices, and aggressive fiscal policy will ultimately produce the exact inflation (and higher prices) that Trump campaigned against.

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