Analysts at Bank of America expect oil prices to rise $100 a barrel as a result of the Iran war, even if the war ends within weeks, slowing economic growth and rising inflation throughout the year.
“The war dividend so far: mild stagflation,” Bank of America economist Claudio Irigoyen and his team wrote in a note on Wednesday, referring to the economic phenomenon of rising inflation and slowing growth.
Economists say that while the world economy has become less dependent on oil, it has become more sensitive to natural gas and fertilizers. This is a significant risk for Europe and developing economies.
“The Iran war is not an oil shock, it is an energy shock,” Irogoyan wrote.
Economists predict that U.S. economic growth will decline by 50 basis points in 2026, reaching 2.3%. Headline inflation is now expected to rise from 2.8% to 3.6% in 2026. Globally, economists also revised down gross domestic product (GDP) to 3.1% and raised their inflation forecast to 3.3%.
“This is consistent with a stagflation shock that would have an earlier and more significant impact on inflation than GDP growth, under our new base case, where oil prices will remain near $100/barrel for the remainder of 2026,” Irigoyen wrote.
Read more: How the oil price shock hits your wallet (from gas to groceries)
Bank of America’s analysis assumes the war will end by the end of this month.
However, if the conflict escalates and continues, “a sharp rise in energy prices, coupled with a sharp correction in asset prices, could tip the global economy into recession,” Yrigoyen wrote.
Read more: What is a recession? How does it affect you?
Economists still expect the Fed to cut interest rates by 50 basis points this year, but the rate cut has been postponed from summer to fall and acknowledged “the risk that a rate cut may not materialize is high.”
Wall Street is increasingly pushing back on rate cut expectations, with Goldman Sachs predicting two rate cuts in the fourth quarter.
“The labor market is softening, wage growth is already below 2% inflation, and inflation expectations are well anchored,” Goldman Sachs analysts wrote on Wednesday.
“Against this backdrop, an oil shock large enough to trigger concerns about persistent inflation could also cause significant economic damage and potentially lead to a recession,” they added.
Earlier this week, Fed Chairman Jerome Powell said inflation expectations were “very well anchored” and that “the trend is to look at any type of supply shock.” His comments eased growing concerns about an unexpected rate hike later this year.