Over the past several years, the global economy has weathered significant upheaval, avoiding a widely forecast recession in 2022. However, the latest Middle East conflict might push an already vulnerable global economy beyond its limits.
Since U.S. and Israeli attacks started Saturday, renewed conflict in Iran has already shaken global markets. On Tuesday, the S&P 500 dropped over 1.5%. International investors also took hits, as indexes plummeted in London, Hong Kong, Tokyo, and other major markets.
If the war persists and expands across the Middle East, market chaos might only be the beginning. A lengthy, chaotic conflict involving multiple parties could drive global energy prices higher, spurring inflation and halting economic growth—a harmful combination called stagflation.
“Much will hinge on how long the conflict lasts and how far it spreads,” Mohamed El-Erian, a top macroeconomic analyst and chief economic advisor at , stated Monday. “The broader the spread, the more stagflationary the impact on the global economy.”
The Iran conflict is likely to cause major instability in energy markets, especially for oil and natural gas. While Iran is a major producer and exporter of both, the key risk is war-related disruptions to tanker traffic through the Strait of Hormuz—a narrow channel linking global markets to Persian Gulf oil and gas fields. A long-term closure of the strait—whether enforced by Iran or because merchant ships avoid the missile-besieged region—would impact of globally traded oil and gas supplies.
Former White House energy advisor Bob McNally that a prolonged strait closure would trigger a “guaranteed global recession,” as nations rush to find alternative energy sources and sudden supply shortages drive up prices.
Oil and gas prices following the attack, and maritime insurers for ships traveling through the strait as missiles reached areas as distant as the international tax havens of .
El-Erian emphasized that the final impact depends on the conflict’s duration and geographic scope. A brief, contained escalation would result in a sharp but temporary rise in energy prices and headline inflation, he noted. However, a prolonged, expanding conflict would “fuel inflation, disrupt supply chains, and weaken growth.”
The Middle East instability couldn’t have struck the U.S. economy at a worse moment. El-Erian pointed out that stagflation risk is elevated due to the Federal Reserve’s “limited” policy flexibility. In an energy shock, the Fed might normally cut short-term interest rates to ease inflationary pressures. But several Fed governors about significant rate cuts this year, highlighting that inflation has stayed above the Fed’s 2% target for five straight years. The in January showed current inflation at 2.4%.
El-Erian wasn’t the only expert to observe that the U.S. entered this conflict with a Fed that has less policy room to maneuver. At an S&P Global conference Monday, former Treasury Secretary Janet Yellen that ongoing inflation makes aggressive rate cuts unlikely, no matter what occurs in the Middle East.
“I think the recent Iran situation puts the Fed even more on hold, more reluctant to cut rates than they were before this happened,” she said.
Even before the Iran conflict began, worries were growing about the U.S. economy’s near-term prospects. GDP growth at the end of last year, and recent Labor Department data revealed that employers added just 181,000 jobs in 2025—the weakest labor market performance since the pandemic.
In a Sunday, El-Erian described the Iran strikes as “yet another shock to a global economy that has so far shown remarkable resilience.” During a on Monday, President Donald Trump said the U.S. campaign in Iran might last four to five more weeks, but could “go far longer” if needed. The key question is whether the world can endure such a prolonged shock without collapsing under rising inflation and stagnant growth.
“The cumulative effect of these disruptions is a fresh potential bout of stagflation blowing through the global economy,” El-Erian wrote.