Inflationary consequences of the war
Financial markets face a crisis. The virtual cessation of Middle Eastern energy supplies will have very serious consequences for global inflation, bond yields, and the dollar itself.
Introduction
Like rabbits caught in the headlights of an oncoming car, investors barely moved in the face of last week’s events in Islamic lands. With the oil price moving sharply higher on Friday, there is bound to be a dawning realisation in the coming weeks that there’s an inflation shock coming. It is not yet seen to be serious, because there’s an assumption that the combined US—Israeli attack on Iran will be over in a week of two with Iran’s defeat and that normality will return.
This is a mistake which underestimates Iran, pandering to western propaganda which is one sided. It ignores the fact that both the US and Israel are short on ordnance and missiles, while in fear of the Great Satan Iran has been growing and evolving its arsenal for the last forty years.
Whatever the outcome, US involvement appears to be the height of hubristic folly. Short of a nuclear detonation, Hormuz will be closed for an extended period. Iran is also spreading its counterattacks not just to US bases in the region, but to energy infrastructure in the Gulf and also Azerbaijan whose Baku pipeline is a major supplier to Israel. Not yet in the headlines, the Houthis in Yemen are likely to seal off the Red Sea and Suez as well.
Aware of the dangers of further escalation, GCC member states are reported to be desperately seeking an early end to the conflict. In addition to loss of oil and LNG revenues, they know that the blockade of inbound container ships through Hormuz will create enormous economic damage for them, with essential supplies including food rapidly running short. And they will be praying that Iran doesn’t attack water desalination plants upon which the region relies heavily.
Doubtless, in a few years’ time volumes will be written about the consequences of all this folly. But the purpose of this article is to concentrate on just one aspect: the shock to the western financial system. And we should note that following the Covid shock inflation began rising almost immediately, as the BLS chart of US CPI change below demonstrates:
