A new study from the Dallas Federal Reserve Bank indicates that prolonged disruptions to global oil shipping due to the Iran conflict could push U.S. inflation rates above 4% before the end of this year, with potentially steeper short-term spikes possible.
However, the research published Tuesday suggests that while headline inflation numbers may climb, the impact on long-term inflation expectations would remain relatively small. Federal Reserve officials closely monitor these expectations and have found reassurance in their current stability.
“There is little evidence of higher gasoline prices being passed through to core inflation or long-run inflation expectations becoming unanchored,” the Dallas Fed study authors stated.
The research comes as Middle East tensions reached a critical point Tuesday, with President Donald Trump demanding Iran reopen the Strait of Hormuz or face attacks on its infrastructure including power facilities and transportation networks.
The Dallas Fed analysis examined various scenarios involving the Strait of Hormuz, a critical waterway that handles one-fifth of global oil shipments and has been effectively blocked for five weeks.
According to the study, a three-month closure of the strait could spike inflation by 5.2 percentage points on an annual basis during March, though this surge would fade quickly, leaving fourth-quarter inflation only 0.35 percentage points higher.
A more prolonged nine-month blockade would drive oil prices from their current $115 per barrel to $167, potentially boosting fourth-quarter inflation by up to 1.8 percentage points, researchers determined.
Current inflation measured by the personal consumption expenditure index stood at 2.8% in January, compared to the Federal Reserve’s 2% target.
Core inflation, which strips out volatile food and energy costs, would see smaller increases of 0.18 percentage points for a three-month closure or 0.49 percentage points for a nine-month disruption. Core inflation measured 3.1% in January.
The study found that household inflation expectations would see more limited increases. Short-term expectations spanning one year could climb by as much as 0.8 percentage points, while longer-term five to ten-year expectations that concern Fed officials most would rise by no more than 0.09 percentage points.
