Iran War Pushes Oil Higher, Fed Holds Amid Inflation Persistence

The geopolitical arc has shifted markets in ways that economists did not forecast a quarter ago. The Iran war has persisted for nearly 11 weeks, disrupting Hormuz transits and pushing crude prices higher. While headline oil prices have consolidated after early spikes, the structural shock to energy supply remains live. Hormuz flows fell nearly 30 percent in Q1 2026, equivalent to a loss of 6 million barrels per day. This is not a marginal disruption; it is reshaping global energy flows and inflationThe rate at which prices rise across an economy. dynamics.

The inflationThe rate at which prices rise across an economy. feedback is the story that matters for central banks. Gold is holding a decline as inflation expectations resurface, US Treasury long-bond yields have hit 5 percent for the first time since 2007, and breakeven inflation rates have drifted higher. Minneapolis Fed President Kashkari issued a stark message: inflation is too high, and the Fed will not be rushing to cut rates. This directly contradicts the rate-cut optimism that drove equities higher in early May. India, the Philippines, and other emerging markets are hemorrhaging FX reserves to defend currencies against the oil-driven dollar strength.

The energy supply shock is hitting downstream. Jet fuel costs have forced Air New Zealand to guide for a full-year loss, Qantas has slashed capacity, and automotive aftermarket service (oil changes, filters) is seeing margin pressure from supply-chain disruption. Energy importers face a margin squeeze; energy exporters enjoy tailwinds. But the macro effect is stagflationary: growth is slowing due to demand destruction from higher energy costs, while inflationThe rate at which prices rise across an economy. remains sticky. This is the exact scenario that forces central banks to hold rates higher and longer.

The narrative risk is resolution. If Trump's Beijing summit yields a breakthrough on Iran, or if Middle Eastern stability is restored, oil falls sharply and inflationThe rate at which prices rise across an economy. expectations reset lower. That would reprieve rate-hold expectations and unlock equity upside. For now, though, the Fed's bias is holding, and that constrains multiple expansion.