Key takeaways

  • Analysts say a prolonged war in Iran could push up energy prices and reignite the threat of inflation.
  • Markets already expect the Federal Reserve to be more attentive to inflation risks than it was in recent weeks.
  • The longer the oil shock persists, the more pronounced the economic consequences will be, according to analysts.

While the war with Iran has sent stocks lower and oil prices higher, in many ways, the response has been somewhat muted. This is because many on Wall Street expect the conflict to be short-lived, with minimal disruption to the outlook for energy markets and the global economy. But what if that’s not the case?

Analysts say the consequences of a prolonged war—one that lasts months or longer—will be felt most acutely in energy markets, with the price of oil heading north of $100—more than 30% higher than Tuesday’s levels. That could bleed into other areas of the global economy, with inflation rising and economic growth slowing.

“If disruption is relatively short-lived, history suggests that price spikes driven by geopolitical tension can fade once uncertainty begins to ease,” says Rick de los Reyes, a sector portfolio manager at T. Rowe Price. “But if production or exports face sustained disruption, that would amount to a genuine supply shock, with implications for inflation, interest rate expectations, and global growth.”

Will it be a long or short war?

When conflict broke out between Israel and Iran in 2025, hostilities lasted roughly 12 days. Oil and gas prices jumped in the days leading up to the attacks on Iran and again when fighting broke out, but most of the gains were reversed when a ceasefire was announced.

This time around, oil prices surged when markets opened on Monday morning and continued to climb. Brent Crude, the international benchmark, traded as high as $84 per barrel on Tuesday, a 15% spike from the prior week. WTI crude, the North American benchmark, finished Tuesday’s session at $74.81, up roughly 11% from before the outbreak of the war.

However, even with the rise in oil prices over the last two days, oil remains well below its May 2022 peak of over $114, hit in the wake of Russia’s invasion of Ukraine.

Equity markets have fallen, with losses in Europe and Asia more pronounced than in the United States. US stocks recovered essentially all their declines in Monday’s trading, and on Tuesday, they traded just 1% lower on the day. In the bond market, yields on the 10-year Treasury note ticked up slightly, from just below 4.00% late Friday to as high as 4.11% during Tuesday trading.

In the background, most on Wall Street believe the current war will not last long. “This is going to be temporary, and it’s going to be constrained,” says Paul Christopher, head of Global Investment Strategy at the Wells Fargo Investment Institute. He expects a resolution in a matter of weeks. “It’s a volatility issue, not a supply issue.”

While most observers see the impact of the war not lasting more than a few weeks, that’s not a given. US President Donald Trump alluded to a longer conflict in a social media post on Monday in which he discussed the US’ “virtually unlimited” munitions stockpiles. He wrote that “Wars can be fought ‘forever,’ and very successfully” with medium and upper-medium grade weapons.

What impact would a long war have?

“What if” scenarios focus on the impact a long war would have on energy prices. According to Goldman Sachs, one-fifth of the global supply of liquefied natural gas passes through the Strait of Hormuz, which Iran borders. Shipping traffic has halted since the outbreak of fighting over the weekend.

“If this were to go on for weeks or months, you can’t stop 20%-30% of the world’s seaborne oil and not have some massive reaction,” says Lucas White, lead portfolio manager for GMO’s Resources, Climate Change, and Quality Spectrum strategies. “We don’t get into predicting commodity prices, and I don’t forecast prices because they’re unpredictable, but I would not be surprised to see oil go over $100 if this went on for a while.”

The potential for a disruption to energy supplies “is the biggest economic concern and risk right now,” says Shannon Saccocia, managing director and chief investment officer - wealth at Neuberger Berman. That’s because of the connection between rising oil prices, inflation, and economic growth.

What would an oil price shock mean for inflation and central banks?

Saccocia says it’s important for investors to view the potential for an oil price shock in the context of where major global economies were before the war. She says Neuberger was expecting a constructive economic backdrop of stable to lower interest rates. In the US, for example, expectations had been for the Federal Reserve to cut interest rates two or three times in 2026.

That picture has changed. “Markets are already expecting the Fed to be more worried about inflation this year than they were a week or two ago because of potentially higher oil prices,” says Katie Klingensmith, chief investment strategist at Edelman Financial Engines.

AMP economist Shane Oliver summed up the impact to the local economy as follows: “The main way Australians will feel the impact of the war is via higher petrol prices. Australian petrol prices track the Asian Tapis oil price closely & Tapis tracks US oil prices. This is because our prices are set globally – to which is then added tax, transport costs & margins. Roughly speaking each $US1 a barrel rise in oil prices adds around a cent a litre to petrol prices. So, a $US40 a barrel rise in world oil prices taking them above $US100 a barrel would add around 40 cents a litre with a 7-10 day lag if sustained."

While energy costs are volatile and thus often stripped out of policymakers’ thinking about the inflation outlook, a lasting jump in energy prices could change the inflation dynamics in the economy. “A sustained higher level of energy prices will ostensibly feed into goods and services pricing as well,” Saccocia notes. Then, she says, “there’s a tipping point where energy prices … create demand destruction, which creates this dampening of growth.” That is especially the case for natural gas prices in Europe, where the fuel is widely relied upon for heating. “So all of this hinges on how long you’re experiencing that oil shock,” she says.

Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable Asset Management, says that in a “worst-case scenario,” oil prices that remain above $100 per barrel could push European inflation up by more than 2 percentage points and send many economies into recession.

The picture in the US is slightly different, though its economy is also vulnerable to global oil price fluctuations. “Even if oil prices go up here, we’re not going to go into recession,” says Christopher of Wells Fargo. “We produce enough of our own oil to keep the economy going, and that’s going to attract a lot of money.”

In Australia, Oliver says, “for the RBA the implications are ambiguous – a boost to inflation but a hit to growth." Despite significant commentary about the impact on inflation AMP is not changing their view and expect the RBA to hold. Explaining their thinking Oliver said, “While higher oil prices flowing from the war could drag on Australian growth via weaker global growth, Australia is relatively well placed as we are a net energy exporter & may benefit from higher prices for gas and coal. And our economy is less dependent on oil.”

Christian Mayes and Leslie Norton contributed to this article.