Israel Iran Conflict Drives Oil Prices Up 6%

Israel’s recent large-scale airstrikes on Iran have sent oil prices surging, with West Texas Intermediate and Brent crude both jumping about 6% to $72.11 and $73.46 per barrel, respectively. This sudden increase in oil prices has raised concerns about a potential resurgence in inflation, which had shown signs of cooling in recent months despite President Donald Trump’s tariffs.

The prospect of a prolonged conflict between Israel and Iran could keep oil prices elevated, thereby dragging inflation up and preventing the Federal Reserve from lowering interest rates. Prime Minister Benjamin Netanyahu has indicated that Israel’s offensive will continue for as long as necessary to eliminate Iran’s nuclear threat. Iran has already retaliated with drone attacks and canceled another round of talks with U.S. officials over easing sanctions in exchange for concessions on its nuclear program.

This escalating conflict sets the stage for a potentially extended period of high oil prices and inflation. While Israel has not yet targeted Iran’s oil production and export facilities, such an attack or Iran blocking the Strait of Hormuz, a key chokepoint in the global oil trade, could send crude prices soaring by $20 per barrel or more, according to analysts' estimates. A surge in oil prices to $80-$100 a barrel could add up to 1.0 percentage point to inflation in developed markets, according to Capital Economics. However, they also noted that such a spike in prices would likely result in more OPEC+ production coming online, thereby limiting the length of the inflation shock.

Despite the recent lower-than-expected readings on consumer and producer prices, which had raised hopes for the Federal Reserve to have more leeway to lower interest rates later this year, the current geopolitical tensions have dimmed those hopes. The 10-year Treasury yield jumped 6.9 basis points on Friday to $4.426, reversing a dip in the immediate aftermath of the attacks, as rate-cut optimism cooled.

With the risk of a recession easing as Trump has backtracked on his most aggressive tariff rates, any Fed rate cuts would have to come from continued cooling in inflation. Policymakers are expected to keep rates on hold again amid concerns tariffs may have a bigger impact on prices over the summer, when companies run out of pre-tariff inventory and can no longer absorb the cost of higher duties. After the latest inflation data, Trump continued to pressure Fed Chairman Jerome Powell about lowering rates, ahead of the Federal Open Market Committee’s meeting next week.