Inflation from Iran

Inflation from Iran

Inflation has been dropping since its highs in 2022 until the Iran conflict began. Inflation immediately pushed back up and hit a relative high of 4.2% in May 2026. The June inflation rate was 3.5%, which is much improved, but the Iran conflict is still underway.

 

Here is the logical connection between Iran and inflation. First, the US had been on a slow and steady declining inflation trend with hopes of reaching the Fed’s 2% target. This was a lofty goal and unlikely to occur without a recession or several more years of low drama in the global economy.

 

Second, Trump attacked Iran with the help of Israel. They successfully knocked out a large portion of Iran’s military capabilities and all their current leadership.

Third, this caused the price of oil to very quickly spike to over $100 per barrel, given the large oil suppliers located in and around the Straight of Hormuz. Oil hit a high around April 1 and was on a bouncy decline in April and May to around $70 per barrel.

 

Fourth, then there were continued flare-ups after multiple “deals” had been made and broken. As we enter the end of July, oil prices are back in the $90 per barrel or more range.

Fifth, this increase in oil prices for a prolonged period is affecting supply chains because oil is a critical input for the production of many goods and, most importantly, for the transportation of products and people. This is the primary cause of the 4.2% inflation rate seen in May 2026.

 

Sixth, the drop in inflation in June may be short lived if the Iran conflict continues. The steps listed here can continue to affect the price of oil and ultimately the rate of inflation for months to come.

Seventh, eventually, high oil prices will not cause additional inflation. Rather, the risk is an economic slowdown or even a recession because oil is such an integral part of the economy, and a 50% increase in any part of the supply chain can cause a drag on the economy. Oil and gas prices are no different.

 

We will have to wait and see if the Iran conflict gets resolved and oil prices go back down or if they stay elevated enough to cause a slowdown in the economy. Dealing with Iran and their nuclear threat is and was worth it, but there is certainly a price to pay, and we are probably not done paying it yet.