Uncertainty surrounding war revives the specter of stagflation in the United States.

An old ghost that has haunted the United States from time to time since the end of the pandemic – stagflation , an economic situation that combines high inflation, high unemployment, and a recessionary economy – has returned to haunt analysts and the market amid the lack of prospects for a quick solution to the conflict involving the US, Israel , Iran , and neighboring Arab countries.

The erratic movements of the financial and oil markets in recent days have brought back not only the prospect of a return to stagflation – warned by at least six reports from investment managers and Wall Street analysts earlier in the week – but have also helped to bring inflation back into the national debate, raising doubts about how the Federal Reserve, the Fed (the US central bank), will react in conducting interest rate policy at its next meeting next week.

The expectation of an interest rate cut starting in July is already being postponed until September – that is, if the Fed doesn't have to raise the current rate, in the range between 3.5% and 3.75%, to control inflation, which is expected to rise from the 2.4% recorded in January, still far from the 2% target.

The up-and-down movement of expectations was strong on Tuesday, March 10th. A day after US President Donald Trump signaled that the conflict in the Middle East could end "very soon," easing concerns about prolonged disruptions to the global oil supply, Brent crude futures fell more than 12% during the day, to $85 per barrel.

The announcement by the world's largest economies that they will release their strategic oil reserves also helped boost stocks worldwide and brought a breather to the financial market, partially reversing the panic registered the previous day, when the price of a barrel reached US$120, the highest value in four years.

Trump's attempt to regain prominence in managing the conflict, however, proved insufficient to stem the effects on the American and global economy caused by the closure of the Strait of Hormuz , near the Iranian coast and responsible for 20% of the world's oil transport.

Strictly speaking, the closure of the strait is proving to be the most feared factor in the war, as it affects the production, storage, and transport of oil, natural gas, and fertilizers from the Persian Gulf to the rest of the world. And the White House appears powerless to reopen the waterway, a decision that depends more on Iran than on the powerful American arsenal.

To give an idea of the interconnectedness of the Hormuz blockade with the global economy, the fact that the US is the world's largest oil producer – with 13.6 million barrels/day – did not prevent a new increase in the price of gasoline in the country on Tuesday, the 10th, reaching an average of US$ 3.54 per gallon, an increase of 19% since the beginning of the conflict on February 28th.

Diesel prices also rose 24% in the US during the period, reaching almost $4.66 per gallon. These prices could increase the cost of everything transported by truck, from Amazon deliveries to groceries.

Exaggeration and tension

Concerns about a return to stagflation – exaggerated, at least for now – began to take shape last Friday when a Labor Department report showed a slight increase in US unemployment, from 4.3% in January to 4.4% in February. But what surprised analysts was another indicator: the loss of 92,000 jobs in just one month.

Chicago Fed President Austan Goolsbee noted on the same day that rising unemployment, coupled with the oil price shock, creates "exactly the kind of stagflationary environment that is as uncomfortable as any a central bank faces."

The Russian invasion of Ukraine four years ago drastically increased energy prices, and the term stagflation hasn't been used with such force in the US since. At the time, predictions of a recession that never materialized were widespread.

Today the situation is different for two reasons. First, the American job market is slower than in 2022. And the oil shock resulting from the war with Iran is potentially much greater than that of the war with Russia.

This is because the disruption of supply in the Strait of Hormuz creates a potentially much larger supply shock, extending beyond oil, raising energy and fertilizer costs, harming food planting in the early spring in the Northern Hemisphere, with the potential for increased inflation and reduced growth.

This combination of factors is likely to exacerbate the Fed's dilemma regarding interest rates. Even before the war, the US central bank was already struggling to bring inflation back to its 2% target. With a weaker labor market, the expectation is that it will keep rates stable, but the forecast to resume rate cuts in July is likely to be postponed until the September meeting.

A resurgence of inflation would represent a particularly thorny problem for the Fed, which simultaneously faces a stagnant labor market. Any attempt to boost the economy with interest rate cuts could worsen inflation, while delaying such measures could cause a rise in unemployment.

Each $10 per barrel increase in the price of oil, if sustained, translates into an increase of approximately 0.05 percentage points in "core" inflation, which excludes volatile food and energy prices. On the other hand, Goldman Sachs economists calculate that each $10 per barrel increase in the price of oil, if maintained, would reduce 2026 GDP growth by about 0.1 percentage points.

Middle ground

The prediction of so many potentially negative scenarios explains the renewed discussion about stagflation. David Kelly, chief global strategist at JPMorgan Asset Management, states that, for now, "anyone who wants to use the word 'stagflation' with a lowercase 'e' can," but warns about what is urgent.

“The U.S. needs to find a middle ground with whichever Iranian government is in power, because they need to restore maritime transport,” says Kelly. “They need to create a situation where tankers can safely cross the strait; if that’s not possible, the gasoline problem won’t be solved.”

In other words, market players are beginning to get irritated with Trump's bravado against Iran, which has no solution in the short term. Ten days after the start of the American and Israeli bombing, the war has become global, to the point of already involving more countries, more major powers, and more overlapping conflicts than any crisis since the Cold War.

At least 20 countries are now militarily involved — whether firing, protecting, or discreetly supplying — as a growing energy clash batters nations far from the front lines.

In addition to closing the Strait of Hormuz, Iran has attacked at least 10 countries since the beginning of the war, hitting American and Israeli bases, Persian Gulf capitals, oil infrastructure, and civilian areas. Israel is fighting on two fronts, bombing Iran and combating Hezbollah on the ground in Lebanon, where nearly 1 million people have been displaced in ten days.

Trump continues to fail to present a clear objective for the US, whether he intends to neutralize the Iranian nuclear program, overthrow the Ayatollah regime, or a third, even more catastrophic alternative: to incite a civil war in the Persian country by arming the Kurdish minority.

The supposed initial intention – to reverse a domestic unpopularity rating above 50% – is now a thing of the past. Less than half of Americans support military action, fuel prices have increased, inflation is trending upwards, and the US now even fears a return to stagflation. At this rate, Trump will have to pull rabbits out of a hat to avoid defeat in the midterm elections in the second half of the year.