Post-War Inflation
According to Trump, the conflict in the Middle East will come to an end soon. At a minimum, this would imply an agreement regarding Iran’s enriched uranium and the reopening of the Strait of Hormuz.
Financial markets appear to be taking Trump at his word, as evidenced by declining prices for oil, gas, helium, and fertilizers. However, markets also recognize that production and transportation of these commodities cannot be restored overnight and will require time. Assuming this process takes several months, markets seem willing to look through the short-term disruption.
We are less convinced that developments will unfold so smoothly. While it is clear that Trump aims to bring the conflict to a swift conclusion, the key question is to what extent Iran will cooperate. Although Iran has an interest in ending the war, both its regime and population are accustomed to enduring prolonged hardship—unlike the U.S. electorate. It would therefore not be surprising if Tehran prolongs negotiations and keeps the Strait of Hormuz closed for an extended period. In that case, economic pressure on the United States would intensify, potentially enabling Iran to extract further concessions from Washington.
Should this scenario materialize, commodity prices would likely rise rapidly, inflation in Western economies would increase, and economic growth would slow—potentially tipping into recession.
That said, this represents a downside scenario, and it remains uncertain whether Iran would ultimately pursue such a strategy. More likely, some form of agreement will be reached before conditions deteriorate to that extent. In such a case, commodity prices may rise initially, but not to extreme levels. The primary impact would be elevated prices rather than widespread physical shortages.
It is important to note, however, that the longer the Strait of Hormuz remains closed, the longer it will take for commodity production and logistics to return to normal levels. As a result, prices are likely to remain elevated for some time even after reopening. The key question is whether this will translate into lower inflation. We believe it will not.
Secondary Effects
The extent to which rising commodity prices drive inflation depends not only on the price increases themselves, but also on the degree to which these increases are passed through to end consumers. Economists refer to these as “secondary effects.” These effects become more pronounced when they lead to higher wages.
In general, the stronger an economy continues to grow despite rising commodity prices, the greater these secondary effects tend to be. In the current environment, this implies that inflation may be relatively insensitive to whether oil and gas prices rise further or stabilize at current levels. If prices increase further, the resulting loss of purchasing power is more likely to weigh on economic growth than if prices remain broadly stable.
Fertilizers, however, present a more acute risk. If the Strait of Hormuz remains closed for four to six weeks, a significant portion of global food production could be lost. This requires close monitoring, as food shortages carry far more severe consequences than elevated energy prices.
Conclusion
Markets currently assume that Iran and the United States will reach an agreement in the near term, leading to a relatively swift normalization of conditions. We consider this outcome unlikely. Even if a peace agreement were concluded tomorrow, it would take time to fully restore commodity production and distribution, keeping prices elevated in the interim.
The longer this situation persists, the greater the likelihood of secondary effects. Regardless of whether a ceasefire is reached quickly, we expect concerns about rising inflation to increase over time—particularly in the United States, where economic growth remains stronger than in Europe.
As a result, current market optimism could shift toward a more negative sentiment. Central banks may then be forced to tighten monetary policy. If high debt levels limit their willingness to do so, there is a risk of structurally higher inflation.
These dynamics are unfavorable for long-term interest rates and are likely to have broader implications for financial markets as a whole.
Read more on this and related topics in our latest Global Financial Markets Report
