Six months into the Iran War, the economic consequences have been mixed but manageable according to latest analysis. While growth has slowed globally and inflation has increased along with gas prices, the overall impact has been lower than initially predicted. As reported by Reuters, the impact of the energy crisis was lower than initially predicted, in part because of the measures that China took to increase the supply of oil on the market. The war has resulted in thousands of deaths in Iran and 18 U.S. service members, but the economic disruption has not been a complete bust for the global economy. Despite the challenges, there remains growth in the United States and globally, demonstrating resilience in the face of geopolitical tensions. According to The Times of India, the International Monetary Fund said in July that the global economy was being shaped by two forces pulling in opposite directions: the war was weighing on growth, while enthusiasm around AI was providing an offset.
The impact of energy prices on inflation has significantly diminished compared to the Ukraine crisis. According to ING analysis, energy was contributing a whopping four-percentage points to eurozone inflation by July 2022, but today it is adding less than a quarter of that. Similar trends are observed in Britain, with the latest rise in natural gas prices unlikely to change this basic fact dramatically. The inflation rate of energy-sensitive goods and services, representing around one-third of the total inflation basket, has barely budged during the war period. This includes everything from air fares to courier costs, plant prices to cafés, and it represents around a third of the total inflation basket. As reported by The Times of India, oil prices surged after the US and Israel began military action against Iran on February 28, with Brent crude rising from around $72 a barrel before the war to nearly $120 at its peak as shipping through the Strait of Hormuz was disrupted. Prices have since eased, although they remain above pre-war levels.
Food inflation has remained remarkably benign despite war-related concerns. As reported by ING, food inflation is trending down and virtually zero across major European economies. In Britain, food prices are actually lower than three months ago, while annual food inflation across Eastern European economies is negative. This trend should reassure central bank officials who monitor consumer inflation expectations closely. According to THINK Ahead, the simple fact is that we aren't feeling the impact of the Iran War on food prices, with food inflation actually trending down and virtually zero. Across the three major economies in Eastern Europe, annual food inflation is negative, yet most models suggest the peak impact from the Iran War won't show up until next spring.
Wage-sensitive inflation indicators suggest continued economic moderation. According to ING analysis, wage-sensitive eurozone inflation has fallen over the course of this year, with the ECB's forward-looking indicator of negotiated wage growth showing no discernible increase in service sector firms' price expectations. While advertised salary growth has shown a slight pickup, this doesn't align with the ECB's wage growth indicators, supporting the case for cautious monetary policy. As reported by The Times of India, higher energy and transport costs have hit airlines, motorists and consumers, while rising fertiliser prices have added pressure on farmers and food security. Fertiliser prices peaked in April at 44 per cent above pre-war levels, according to the World Bank's price index, with some farmers responding by reducing fertiliser use.
Financial markets have staged a remarkable recovery from the initial war shock. The Dow Jones has gained nearly 19 per cent, the S&P 500 almost 22 per cent and the Nasdaq about 27 per cent from their late-March lows, as reported by AP. According to investment strategist Michael Ashley Schulman of Cerity Partners, "So far, the global economy has pulled off the financial equivalent of a 'Mission Impossible' scene." The rebound suggests that investors have looked past the war's economic disruption, particularly as strong expectations around AI have supported equity markets. Clean energy and electric vehicles have emerged as significant winners, with EV sales recording sharp increases including 110 per cent year-on-year in Singapore, 180 per cent in New Zealand and 300 per cent in Colombia. The International Energy Agency expects EVs to account for 29 per cent of global vehicle sales in 2026, up from 25 per cent in 2025. Meanwhile, US defence contractors have benefited from increased military spending, with companies like Lockheed Martin, General Dynamics, and Northrop Grumman securing contracts linked to the US response to the conflict.
