Stagflation Risks Were Rising Even Before the Iran War

Signs of economic weakness were already emerging before the Iran conflict began, raising concerns that the US economy could face stagflation as energy prices surge.

New economic data released this week shows that inflation remained elevated while economic growth slowed, a combination that has long worried economists and policymakers.

The Federal Reserve’s preferred inflation measure showed prices rising 0.3% in January, bringing the annual inflation rate to 2.8%. Core inflation, which excludes food and energy, rose 0.4% for the month and 3.1% year over year, suggesting price pressures remain persistent.

These numbers were already troubling for markets. But they reflect conditions before the outbreak of the war between the US, Israel, and Iran, meaning the latest surge in oil prices has not yet been reflected in the data.

Oil Shock Could Push Inflation Higher

Economists warn that the conflict could create a global energy supply shock, driving inflation higher while weakening economic growth.

Unlike demand-driven inflation seen after the pandemic, the current situation is more closely linked to disruptions in energy supply.

Rick Rieder, chief investment officer at BlackRock, said the difference is important for the broader economy.

“This conflict represents a supply shock, not demand-driven inflation,” he said. “A supply shock will reduce demand, consumption, and consequently growth.”

Economic Growth Already Slowing

At the same time, the US economy was already losing momentum.

New data showed that US gross domestic product grew just 0.7% in the fourth quarter, sharply revised down from an earlier estimate of 1.4% growth.

The combination of slowing growth and persistent inflation has revived fears of stagflation, a difficult economic environment where prices remain high even as economic activity weakens.

For now, economists say the full impact of the Iran war is still unknown.

But with energy prices rising and growth already softening, the economy may have entered the conflict in a far more fragile position than previously believed.

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