Why has the Iran war sparked fears of stagflation for the global economy?

Oil prices surged and triggered sharp stock-market sell-offs as the US-Israel war on Iran escalated.

“Oil prices continued to surge on Monday, triggering a stark sell-off across some of the world’s leading stock markets amid growing concern that the US-Israel war on Iran could set the stage for a global economic shock”

The Guardian

Key benchmarks posted their highest weekly gains in six years, and West Texas Intermediate soared to more than US$115 a barrel, nearly double its January level of about $60 a barrel.

The Guardian

The article says oil climbed significantly after Iran in effect closed the strait of Hormuz, and recent oil production cuts across the Middle East have worsened supply fears.

Shares in Asia fell heavily on Monday, with Japan’s Nikkei down over 6% and South Korea’s Kospi over 7%.

Investors appeared unpersuaded by Donald Trump’s characterisation of the impact as "short term."

Economists cited in the article warn that higher oil and energy costs will push up inflation globally and drag on growth.

Royal Bank of Canada economists project US inflation would rise to 3.7% if oil holds at $100 a barrel.

The Guardian

Gas Buddy reported US fuel prices rose 25 cents over the week and another 25 cents over the weekend to average $3.44 a gallon by Sunday night.

The article says gas and fertiliser supplies have been hit.

ANZ Bank said Europe’s natural gas prices rose nearly 67% in the war’s first week.

ANZ projected China’s producer prices would rise 0.4 percentage points if oil stays high.

Oxford Economics and the IMF are cited warning that a sustained energy shock would slow world growth.

The IMF said a 10% lift in energy prices would slow global growth from about 3.2% to 3%.

They warned the shock could leave the UK and euro area growing by about 1% or less if the conflict persists.

RSM projects oil at $125 a barrel could cut US GDP by 0.8% while inflation surpasses 4%.

Economists describe the current outlook as stagflationary: higher prices combined with weaker growth.

“Oil prices continued to surge on Monday, triggering a stark sell-off across some of the world’s leading stock markets amid growing concern that the US-Israel war on Iran could set the stage for a global economic shock”

The Guardian

The article reports that central banks are now more likely to raise rates rather than cut them.

Analysts expected the European Central Bank and Bank of Canada to hike at least once in the coming year, the Federal Reserve to delay cuts until September, and the Bank of England to hold rates steady.

Australia is now expected to face two rate hikes this year.

Forecasters cited worst-case scenarios if disruption continues.

Goldman Sachs estimates a month-long disruption could push oil past the record US$145 a barrel, and Westpac estimates three months could see prices rise to US$185 a barrel.

National Australia Bank chief economist Sally Auld said a quick de-escalation would help stabilise prices, but if the conflict endures for another month there would be "material risk of global recession."