A grocery store in Toronto in 2022. Two economists at Goldman Sachs believe today’s inflationary pressures aren’t anywhere close to those in 2021 and 2022.Carlos Osorio/Reuters
The war in Iran has given investors a lot to think about as energy prices soar, bond yields rise and central banks turn their attention toward an economic threat that had been subsiding over the past few years: inflation.
But if that has you rattled, breathe easy (for now).
Joseph Briggs and Megan Peters, economists at Goldman Sachs, believe that today’s inflationary pressures aren’t anywhere close to those that popped up in 2021 and 2022 – and weighed heavily on fixed income investments and many dividend paying stocks.
Their case rests on a key difference between then and now.
Several years ago, inflationary pressures came from widespread supply constraints that were related to pandemic-era shutdowns, which wreaked havoc on everything from bacon to used cars.
Today’s pressures are emanating largely from one source: an energy supply bottleneck in the Middle East as war throttles exports through the Strait of Hormuz.
“While the size of the energy shock will likely prompt some caution (and we have accordingly delayed our forecast for cuts in several economies) a key difference from 2021-2022 is that the supply shock today appears narrowly concentrated in the energy sector,” the economists wrote in a note last week.
The price of crude oil has surged by as much as 70 per cent this year. And the drop in oil exports from the Middle East is the largest supply disruption in history, according to the International Energy Agency.
If you drive a gas-powered vehicle, inflation is already hitting you in the form of surging prices at the pump. There are also signs that rising jet fuel costs will drive up airfares.
The fear is that these rising costs will then filter into the rest of the economy – affecting groceries, for example – as the cost of shipping goes up.
This fear comes and goes, depending on what U.S. President Donald Trump is saying about the conflict and its impact on energy exports and infrastructure.
On Saturday, Mr. Trump said he would “obliterate” Iranian power plants if the country didn’t fully open the Strait of Hormuz to oil shipments, which sounded like a significant escalation.
On Monday, Mr. Trump struck a more conciliatory tone and postponed strikes, which sent oil prices down more than 9 per cent. Then early Tuesday...oh, you get the picture.
His tone will likely shift again and again, virtually guaranteeing that inflation will remain a hot topic in the weeks ahead.
But that doesn’t mean inflation is about to emerge as a significant threat.
Mr. Briggs and Ms. Peters expect that higher energy prices will lower global economic growth by 0.3 per cent and boost “headline” inflation – which includes volatile food and energy – by 0.5 to 0.6 percentage points over the next year.
They expect that “core” inflation – which excludes food and energy – will gain just 0.1-0.2 percentage points. Not good, but by no means disastrous.
Headline global inflation slowed to 3.5 per cent in the fourth quarter of 2025, at an annualized pace, down from 4.8 per cent at the start of the year, according to the International Monetary Fund.
The reasoning of the Goldman Sachs economists rests partly on the fact that non-energy trade through the Gulf economies in the Middle East is small, at about 1 per cent of global trade.
That’s a big difference from the trade problems that spurred the last bout of inflation in 2021 and 2022, when Asian shutdowns ensnared about 20 per cent of global trade.
Trade disruptions could affect the flow of important chemicals and metals through the Gulf, but not enough to create production bottlenecks. In any case, there are workarounds in most cases – methanol being an exception – including the use of substitutes or drawing on storage.
Although prices are up, the economists estimate that the impact on inflation will be about 0.1 percentage point over the next 12 months.
And lastly, the conflict could put pressure on shipping costs as ships take longer routes to avoid danger or airfreight is used as an alternative. So far, so good though: Shipping costs, as measured by the Baltic Dry Index, are holding fairly steady.
“Taken together, our analysis suggests that the major risk to global supply and inflation is mostly confined to energy, which limits the risk that the large second-round inflation effects observed in 2021-2022 will re-emerge,” Mr. Briggs and Ms. Peters wrote in their note.
No doubt, economists often miss significant economic turning points, from recessions to recoveries. And yes, the last bout of inflation surprised a lot of people, including central bankers.
So this is probably not the final word on this topic. Are you worried about rising inflation due to the war in Iran? And are you doing anything about it? Let me know at dberman@globeandmail.com.
Chart of the day
New research that caught my eye
Financial markets have turned volatile since the United States and Israel attacked Iran at the end of February. Tiffany Wilding, an economist at PIMCO, and Andrew Balls, chief investment officer of global fixed income, also at PIMCO, released a paper this week on what could play out if a darker scenario unfolds for the global economy. They provide a simple solution for investors: seek high-quality bonds.
