Impact of Iran Conflict on Global Oil Prices and U.S. Inflation

Recent volatility in global oil prices, influenced by the ongoing conflict with Iran, could begin to drive up inflation rates for consumers in the U.S. This situation puts Federal Reserve policymakers in a tricky position as they contemplate reducing interest rates.

According to an economist from Goldman Sachs, the price of Brent crude oil is projected to continue climbing. The forecasts suggest it could average around $105 per barrel in March and rise to $115 in April, before potentially dropping to $80 per barrel by the last quarter of 2026. This comes amid significantly reduced crude oil shipments through the Strait of Hormuz, which have hit particularly low levels over the past six weeks.

In a scenario where oil flows are disrupted for ten weeks, prices could peak at $140 per barrel but would likely fall back to $100 by late 2026. If there are further disruptions coupled with infrastructure damage that hampers production, we might see prices soar to $160 per barrel, with predictions emerging that they’ll average at $115 in that same quarter.

Goldman Sachs noted, “Most of the war’s influence on U.S. inflation stemmed from soaring crude oil prices.” Typically, a 10% rise in oil prices leads to a 0.2 percentage point increase in headline PCE inflation and 0.04 points in core inflation, primarily due to rising transportation costs.

Energy Shortages in Asia Amid War Tensions

Furthermore, the conflict is heightening energy shortages in Asia, affecting countries like India and Japan. Goldman Sachs has also indicated that the war’s impact is expected to escalate energy-related costs across other sectors, influencing products like fertilizer, which may see price hikes due to export limitations from the Gulf. This is anticipated to increase food prices by about 1.5% this year, contributing an additional 0.1 percentage point to overall inflation.

There are also secondary repercussions. The overall inflation forecast could rise by 0.1 percentage points by late 2026 under the baseline scenario and possibly by 0.4 points in more adverse conditions. These developments are likely to push up the Federal Reserve’s preferred inflation gauge. As of January, the personal consumption expenditure (PCE) index saw a 2.8% increase overall, while core PCE—a metric that excludes the more volatile food and energy prices—rose by 3.1%. Both figures sit well above the Fed’s long-term target of 2% inflation, which explains the hesitation to lower interest rates during recent meetings.

Market Reactions to the Ongoing U.S.-Iran Tensions

As the conflict between the U.S. and Iran stretches beyond a month, market analysts are closely monitoring developments. Economists from Goldman Sachs, reflecting these trends, have adjusted their December 2026 PCE inflation estimates upward by 0.2 points to 3.1%. Under the reverse scenario, PCE inflation could peak at 4.6% in the spring, and stabilize at 3.6% by December. In a more extreme situation, inflation might reach 4.9%, remaining around 4% at year-end.

Additionally, Goldman Sachs has modified its forecasts for core PCE inflation. In the baseline scenario, a rate of 2.5% is expected by year-end, while in adverse conditions this could rise to 2.6% by December.

Potential Economic Growth and Recession Risks

Interestingly, despite these developments, Goldman Sachs believes the conflict is unlikely to cause a widespread global supply chain crisis. Still, they have lowered their economic growth forecast, predicting a GDP growth rate of 2.1% for the fourth quarter of 2026 under normal conditions, and even dropping to 1.9% in a worst-case scenario.

The probability of entering a recession has risen as well, now estimated at 30%, an increase of 5 percentage points. Even though there were two interest rate cuts in late 2026, forecasts remain unchanged. The Federal Reserve anticipates an uptick in the unemployment rate to approximately 4.6%, which is above the median expectation of 4.4% shared during their latest meeting.

Because of persistently high inflation expectations, the Fed has revised its estimates on maintaining interest rates steady this year, increasing the probability from 20% to 25%. Meanwhile, the chance of further rate cuts has been slightly reduced from 15% to 10%.