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Oil price surge from Iran war threatens US growth and fuels inflation, economists warn

  • Scott Willams and Sara William
    • A Chevron station in Los Angeles displays a gasoline price per gallon of over $7 in June 2022. (Frederic J. Brown/Agence France-Presse/Getty Images)

    A Chevron station in Los Angeles displays a gasoline price per gallon of over $7 in June 2022. (Frederic J. Brown/Agence France-Presse/Getty Images)

    Soaring oil prices threaten to hit US growth, worsen inflation and keep the Federal Reserve from lowering interest rates, top economists have warned ahead of the central bank’s first rate decision since the Iran war began.

    US oil prices have jumped almost 50 per cent since the US and Israel struck Iran at the end of last month to about $95 a barrel, sending the costs of petrol and diesel at the pump surging higher.

    The majority of academic economists polled by the Clark Center for Global Markets on behalf of the Financial Times said that, if oil prices were to remain at $100 a barrel, slightly above their current level, US growth will decline markedly.

    Tehran has largely closed the Strait of Hormuz, a waterway through which a fifth of the world’s oil flows, in retaliation for the strikes on Iran. The disruption has caused a global supply crunch and is hitting US consumers and businesses despite the US’s role as a major energy producer.

    “The key question is the extent and duration of a blockage of the Strait of Hormuz,” said James Hamilton, professor at University of California San Diego and an energy market expert. “If it goes on for a month or so, then this is a very big deal. And I think it would lead to a significant downward revision in the kind of growth we’re expecting for this year.”

    Some 68 per cent of respondents anticipated a significant hit to GDP growth this year of at least 0.25 to 0.5 percentage points should oil stay at $100 for the rest of 2026, compared with a scenario with $75 oil. Just 2 per cent thought the economic impact of high oil prices would be positive, with the rest expecting little to no impact in either direction.

    The US economy expanded at a 0.7 per cent annualised clip in the final quarter of 2025, from the previous quarter’s 4.4 per cent growth rate.
     
    Panellists’ growth warnings contrast with White House officials, who say the conflict will do little harm to the prospects of the world’s largest economy.
     
    “If [the war]were to be extended, it wouldn’t really disrupt the US economy very much at all,” said Kevin Hassett, director of the White House’s National Economic Council, on Tuesday.
     
    “It would hurt consumers, and we’d have to think about — if that continued — what we’d have to do about that, but that’s really the last of our concerns right now because we’re very confident this thing is going ahead of schedule,” he said in an interview with CNBC.
     
    The Trump administration’s war on Iran has exacerbated the challenges facing Fed officials, who are set to make their latest policy decision on Wednesday.
     
    Even before the conflict began, the central bank was facing a delicate balancing act over whether to prioritise its fight against inflation or the latest signs of a slowdown in the US labour market.
     
    The Bureau of Labor Statistics said the US economy lost 92,000 jobs in February while corporate America has laid off tens of thousands of workers this year.
    At the same time, the jump in petrol and diesel costs — now at the highest levels in either of President Donald Trump’s White House terms — risks undermining the American public’s faith in the central bank’s commitment to stamp out inflation.
     
    Headline personal consumption expenditures inflation (PCE) is 2.8 per cent and has been above the 2 per cent level the Fed targets since early 2021.
     
    If oil stays near $100 for a prolonged period, it would lead to a rise in headline PCE inflation of at least 0.25 to 0.5 percentage points by the end of the year, according to more than 80 per cent of those polled.
     
    The 47 economists — surveyed quarterly by the Clark Center, part of the University of Chicago’s Booth School of Business — also say the Fed will now need to wait longer before core PCE inflation falls to its 2 per cent goal. That category excludes food and energy prices.
     
    Six in 10 participants in the survey now expect it will take until at least the first half of 2028 before price pressures return to 2 per cent — up from just under half in December.
     
    Fed watchers widely expect the central bank to hold the federal funds target range at 3.5 per cent to 3.75 per cent on Wednesday. Markets are betting the oil price rise has pushed the next cut back until the spring of next year, after three quarter-point cuts in 2025.

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    Fed officials will also publish their latest economic and rate projections, known as “dot plots”, later on Wednesday.
     
    The FT panel in the latest survey was less sure US benchmark borrowing costs would end the year lower than their current level. Roughly a third said they now expected no cuts for the duration of 2026, compared with 15 per cent in December.
     
    “My prediction right now is that you’re not going to see much action [from the Fed]for a while,” said Stephen Cecchetti, a Brandeis University professor. “The uncertainty is so high that you have to wait. I would be waiting. But I would be unhappy that I had to start from here.”
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