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I’m old enough to remember when the Iran war was going to be a generational energy and price shock. It would cause inflationary chaos to the global economy and rapidly remake the world as we knew it.
To be clear: it’s entirely possible that the situation in the Gulf deteriorates and that global hydrocarbon supplies are interrupted again. There are also likely to be long-term consequences of what we’ve seen so far, encouraging the shift towards renewable energy as insurance against a repeat.
But if we assume the Strait of Hormuz will remain at least partially open to ships and particularly oil tankers, the short-term impact of the war has not been cataclysmic. A consensus is solidifying that the shock will be notably weaker than the combined impact of the supply chain, fuel and food disruptions of the Covid-19 pandemic and Russia’s invasion of Ukraine in 2022.
Perhaps more interesting than the contrasts between Iran and Covid-Ukraine are their similarities compared with the truly inflationary era of the 1970s, which experienced its own oil shock in 1973. Dire predictions that these recent episodes marked a return to persistent stagflation with rising prices and economic dislocations have so far been proved wrong.
Measured by import price inflation in emerging markets, which typically bear the brunt of global economic crunches, the Iran price spike has been much lower than the Covid-Ukraine disruption. It’s also considerably weaker than an episode in 2016 which saw a confluence of Chinese credit stimulus, a global commodity boom and a strong dollar.
There are a couple of big differences between inflationary pressures in the current episode and those in Covid-19 and Ukraine, one being the global trading system. There were snarl-ups in container cargo from 2021 onwards which disrupted supply chains and pushed prices higher. As it happens, they reflected a demand-side phenomenon of soaring consumer durables purchases rebounding from the recession in 2020 rather than a supply disruption in itself. Container ships kept sailing and port capacity wasn’t affected: even the often-maligned west coast US ports were still handling record amounts of cargo. Still, the excess demand created what looked and acted like a supply shock to value chains and hence the global economy.
By contrast, non-oil trade over the past few months has performed reasonably well, after an initial period of rapid adjustment. The Strait of Hormuz is a closed lymphatic capillary of trade, not an arterial thoroughfare carrying the oxygen of commerce, and its blockage hasn’t affected container trade much. The region’s largest transshipment hub, Jebel Ali port in Dubai, saw its business quickly transfer elsewhere. Container rates stayed quiescent in the first months after the war began, and their rise more recently reflects a seasonal surge in demand and shippers front-running Donald Trump’s new tariffs, not supply disruptions.
Food price inflation has also been far lower. Unlike the Ukraine war, which disrupted two of the world’s leading grain exporters, the Gulf countries are net food importers. So far, the interruption to fertiliser supply doesn’t seem to have affected planting in Europe or North America, and probably not southern hemisphere producers like Australia either.
Stockholding and fertiliser management have turned out to be flexible and efficient enough to cope. Whether the air pocket of fertiliser supply from the period the strait was shut is going to do a lot of damage remains to be seen, but exports have resumed. India, one of the world’s biggest urea and fertiliser importers, heavily dependent on the Gulf, seems to be doing fine.
So what of policy reactions? Reasonable people can argue that central banks were too slow to react to inflationary pressure in 2022. Be that as it may, the fact remains that the global economy achieved a soft landing in 2024. A rise in the price level even during the Covid-Ukraine episode set off at most a modest wage-price spiral. Central banks raised rates quickly but it didn’t need a recession to squeeze inflation out of the system. The standard postmortems attribute that to the belief that inflation would stay low, for which we can at least partly thank generations of central bankers since the dark days of the 1970s anchoring expectations by credible monetary policy.
Future shocks are no doubt coming, the El Niño weather system episode later this year for one. I also doubt we’ve heard the last of disruptions in the Strait of Hormuz: Trump declared the ceasefire with Iran over on Wednesday, though he’s done similar before. But ultimately, whether an era is defined by stagflation is not determined by energy or other price shocks: it’s determined by how policymakers, consumers and businesses react. So far I can’t see much to conclude that the Iran war will mark a fundamental break with recent experience and take us back to the 1970s.
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