S&P: Negative supply shock from the Middle East war will lower US GDP growth and raise inflation

The ongoing Middle East conflict has triggered a significant negative supply shock, with global oil prices surging to multi-year highs and disrupting energy markets. S&P Global Market Intelligence notes that the war's impact on energy infrastructure and trade routes has heightened inflationary pressures while dampening near-term US GDP growth. The closure of the Strait of Hormuz, a critical oil transit chokepoint, has brought shipping to a near standstill, exacerbating price volatility and economic uncertainty.

US GDP growth is now projected to slow as households face higher energy costs, with gasoline prices climbing 50 cents per gallon since the conflict began. The consumer-driven economy risks a contraction if spending on discretionary goods and services declines amid tighter budgets. Meanwhile, businesses may delay hiring or investment decisions, compounding growth challenges.

Inflation remains a key concern, with oil prices briefly reaching $119 per barrel in early March—a level that could push annual inflation above 3%. While the Federal Reserve has maintained a stable inflation rate of 2.4% year-over-year as of February, analysts warn that persistent energy shocks could force policymakers into difficult trade-offs between curbing inflation and supporting growth.

Economists remain divided on recession risks, with probabilities estimated between 20% and 35% depending on war duration and oil price trajectories. However, the US economy's resilience—as a net energy exporter and a $30 trillion GDP entity— provides some buffer against prolonged shocks. The coming months will test policymakers' ability to navigate this complex interplay of supply disruptions, inflation, and growth.