Iran war drives global inflation surge as central banks reverse course

Wednesday 06 - 07:20

Two months into the conflict in the Middle East, the economic fallout from the war in Iran has spread well beyond energy markets, rippling through petrochemicals, manufactured goods, food, and consumer products as companies pass rising costs onto buyers and central banks around the world prepare to tighten monetary policy.

The war, which began with American and Israeli airstrikes against Iran in late February, triggered what the International Energy Agency described as the largest supply disruption in the history of global oil markets. The effective closure of the Strait of Hormuz and the halt of Qatari LNG exports, which represent roughly one-fifth of global supply, drove U.S. oil prices up more than 68 percent since the conflict began.

Major European chemical groups were among the first to translate those costs into price shocks for downstream industries. LANXESS announced increases of up to 50 percent on plasticizers and up to 35 percent on flame retardants in March, citing substantially higher energy, raw material, and logistics costs, before applying a further 40 percent increase on sulfur-based products. BASF implemented increases of up to 30 percent on household and industrial cleaning products effective April 1, then announced an additional 25 percent rise on plastic additives in late April, explicitly citing the military conflict in the Middle East as the driver.

The shock has now reached the food supply. Higher diesel and transportation costs are already pushing prices up in grocery stores worldwide. Sri Lanka has introduced fuel rationing, and the British agri-food sector has warned that food price inflation could triple by year's end.

Central banks that had been easing monetary policy are now reversing course. The Reserve Bank of Australia delivered its third rate increase of 2026 on May 5, bringing rates back to 4.35 percent. BNP Paribas forecast that the South African Reserve Bank will raise rates at its next two meetings to protect its revised 3 percent inflation target. Brazil's central bank flagged emerging inflationary risks the same day, citing the ongoing conflict. Turkey's central bank ended its easing cycle with rates at 37 percent and raised its overnight rate by approximately 300 basis points, with investors anticipating a possible increase to 40 percent, as Turkish annual inflation came in above expectations in April.

The scale of the economic damage is drawing comparisons to worst-case scenarios that analysts had previously treated as remote possibilities. Mark Zandi, chief economist at Moody's Analytics, warned that rising fuel and commodity prices caused by the war risk causing even greater economic damage than tariffs by simultaneously slowing growth and stoking inflation. With gasoline prices up by roughly one dollar per gallon and Americans spending an estimated $23 billion more on fuel since the conflict began, Zandi said households will face higher costs across everything from groceries to parcel deliveries and airfares in the months ahead. The IMF revised its global growth forecast down to 3.1 percent for 2026 in April and raised its inflation projection to 4.4 percent, up from 3.8 percent in January. In an adverse scenario where disruptions extend into 2027, the Fund warned growth could fall to 2 percent and inflation could reach 6 percent, an outcome that, nine weeks into the war, looks increasingly less like a tail risk and more like the actual trajectory of the global economy.