Iran conflict fuels stagflation fears, derails rate-cut bets

The Iran war is reshaping monetary policy expectations across the developed world. US inflationThe rate at which prices rise across an economy. data released Tuesday showed headline CPI at 3.7% year-over-year, hotter than expected and driven primarily by surging gasoline and food prices tied to disrupted Middle East energy supplies. Morgan Stanley's chief economist now expects inflation to peak in May or June, keeping the Fed on the sidelines for the rest of 2026. Bond traders have aggressively repriced rate-hike probabilities upward, reversing months of dovish positioning. European central banks face similar pressure; the ECB's probability of raising rates has climbed significantly as the conflict chokes LNG flows and LNG prices spike across the continent.

The supply-chain damage is spreading. Japan's coal-power generation is rising as Middle East LNG scarcity drives up natural gas costs, forcing utilities to switch to dirtier fuel. India has hiked import tariffs on gold and silver to defend its currency and stem capital outflows. European oil and gas lobbies are urging Brussels to soften natural gas storage targets to avoid summer refill pressures. Australia's treasurer says the macroeconomic outlook is now "much more uncertain" with oil prices expected to remain elevated. Goldman Sachs forecasts the dollar will strengthen further as the energy shock keeps yields elevated and growth resilient.

The conflict is weaponizing commodity supplies. Iran's main export terminal appears to have halted shipments after satellite imagery showed a prolonged standstill. Russia's oil output is stalled as Ukrainian drone strikes intensify. Kazakhstan is cutting crude exports from a key Black Sea port next month. Copper has climbed above $14,000 per ton toward record highs as mine disruptions tighten global supplies. Fertilizer prices have spiked 40% above pre-war levels, hitting India's agricultural budget hard. Energy importers face sustained margin compression while defence names and commodity exporters are gaining.

Skeptics point out that the energy shock may prove transient if the ceasefire holds and shipping lanes reopen. Some analysts argue the Fed's hands remain tied by underlying labour-market softness and slowing capex growth outside AI. But traders are betting the immediate pain is real: equities sold off sharply on Tuesday, tech stocks led the decline, and volatility is expected to persist as Trump heads to Beijing for summit talks amid the uncertainty.