Could the impact on oil from the Iran-Israel conflict fuel inflation?

The impact on oil prices due to the military strikes between Iran and Israel has raised the prospect of a resurgence in global consumer inflation. The price of West Texas Intermediate (WTI) climbed above US $72 a barrel on Sunday for the first time since February. In response, traditional haven assets such as gold drew investor attention. It traded around 1% higher on Friday at $3,426 an ounce, close to the record high of $3,500 recorded in April.

“Renewed geopolitical tensions reminded markets late last week that there was more to consider than fiscal policy alone,” says Karen Manna, Portfolio Manager and Investment Director of Fixed Income at Federated Hermes. “What had been setting up as a long summer of waiting for the US legislative branches to drive the tone shifted quickly to a much broader issue,” she says.

“While inflation seemed to be heading in the correct direction, the possibility of higher oil prices and the lingering question of the timing, degree and extent of tariff impact continue to drive uncertainty,” she says.  

How far might crude prices rise?

With one considerable caveat, research from the European Central Bank (ECB) suggests no clear historical relationship between oil prices and geopolitical events. In fact, after many such events, they typically remain weak for several months afterwards.   

For example, the price of brent crude rose 5% in the aftermath of the 9/11 attacks in 2001 but dropped 25% within two weeks. Similarly, prices rose 30% in the two weeks following Russia’s invasion of Ukraine in 2022, but returned to pre-invasion levels after about two months. There are many variables, and the conflict is likely far from over, but since the spike following after the initial strikes, oil has followed that trend. The price of WTI was back down to $71 a barrel on June 17. 

But the ECB noted one significant exception. If the countries involved in the geopolitical event are central to global oil production, the risks to supply rise and could generate significant upward pressure on crude. This could be the case in the Iran-Israel war. Sizable volumes of oil are shipped through the Strait of Hormuz, which sits between Oman and Iran. In 2024 and in the first quarter of 2025, more than 25% of total global seaborne trade flowed through the strait, according to the US Energy Information Administration. In the absence of reasonable alternative shipping routes, it represents a significant potential chokepoint. If the embattled regime in Tehran obstructs travel there, the impact on oil prices could be significant. 

Inflation implications

An oil price shock risks triggering a resurgence in inflation, potentially derailing the rate cutting cycle underway at leading central banks.

Global central banks have been struggling to contain inflation ever since the Covid-19 pandemic and Russia's invasion of Ukraine. A shift of inflation risk from “persistent” to “resurgent” due to the Iran-Israel conflict is likely to further complicate an already uncertain economic backdrop.         

John Sidawi, Senior Portfolio Manager, Fixed Income at Federated Hermes says the latest bout of market volatility further narrows the range of options for risk-adverse investors. “The market is teeming with unknowns—from punishing trade levies, stubborn inflation and the prospect of escalating war in the Middle East–leaving investors with the challenge of how to navigate through periods of high uncertainty."

“Some investors may stick with cash, but it is vulnerable to the whims of inflation. Gold is renowned for its haven characteristics, but it bears no income potential. The US dollar remains the reigning world reserve currency, but it has not been the most effective hedge against volatility as of late,” he says.