THE RETURN OF ENERGY RISK

How a regional war put global disinflation back in doubt

For much of 2025 and into the first months of 2026, the world economy appeared to be inching back towards something resembling order. Inflation was easing across the major economies. Central banks were beginning, cautiously, to hint that the harshest phase of monetary restraint might be drawing to a close. Growth, while hardly impressive, remained positive. It was not a moment of exuberance. But it was, at least, a moment of partial relief.

That relief has proved fragile. In recent weeks, renewed conflict in the Middle East has forced an old problem back to the centre of the global economic conversation: energy. When oil prices jump and supply routes come under threat, the consequences do not remain neatly confined to commodity markets. They travel quickly—into inflation expectations, growth projections, financial conditions and central-bank calculations. A geopolitical shock, in other words, soon becomes a macroeconomic one.

The OECD put the point with unusual clarity when it warned that the conflict is “testing the resilience of the global economy” by increasing uncertainty, lifting energy costs and disrupting strategic supply chains. That is more than a diplomatic observation. It is the economic heart of the matter. This is not simply a war with financial side effects. It is a macroeconomic disturbance in its own right.

A regional war with global economic reach

The seriousness of the episode lies not only in the violence itself, but in where it is unfolding. The Middle East remains one of the world’s most sensitive energy hubs, and the Strait of Hormuz one of its indispensable chokepoints. The IMF recently reminded markets that roughly one-fifth of global oil supply and world trade in liquefied natural gas passes through that narrow corridor. When Hormuz is threatened, the question is not merely whether crude becomes more expensive. It is whether the wider architecture of economic stability begins to look less secure.

The Fund has already offered a striking measure of the strain. Maritime traffic through Hormuz reportedly fell by 90%, while oil prices have risen by around 50% since December. That is enough to change the mood of the global economy. What until recently looked like a plausible and manageable path towards lower inflation now faces an external supply shock against which interest-rate policy has limited reach.

Oil as a systemic variable—again

The International Energy Agency has been blunter still. In its March report, it described the conflict as generating “the largest supply disruption in the history of the global oil market”. Flows of crude and refined products through Hormuz—which before the conflict had been running at around 20m barrels a day—have been pushed close to an operational minimum. Output across Gulf producers has fallen by at least 10m barrels a day, and global oil supply is projected to decline by 8m barrels a day in March. In such conditions, Brent moving towards $120 a barrel is not merely a market story. It is a macro signal.

That matters because oil does not stay in its place. It moves rapidly through transport, logistics, electricity generation, manufacturing, fertilizers and, before long, food. On March 26th the World Bank warned that disruptions to transport routes were already raising costs and amplifying supply risks for fertilizers and other strategic agricultural inputs. This is therefore no longer just an energy shock. It is a potential cost shock across the world economy.

From the barrel to the broader price level

This is where the episode begins to matter most. A rise in oil prices does not merely make fuel more expensive; it alters expectations. And in economics, expectations often do as much damage as prices. Once firms, households and investors begin to assume that energy will remain costly for months rather than days, budgets are rewritten, hedging becomes more expensive, investment plans are delayed and confidence in a clean return to inflation targets begins to fray.

The IMF offers a useful benchmark: a 10% increase in oil prices sustained through much of the year could add roughly 0.4 percentage points to global inflation and shave 0.1% to 0.2% off world output growth. Set against the Fund’s own estimate that oil prices have risen by close to 50% since December, the implications are not subtle. Even without assuming a perfectly linear pass-through, the macroeconomic damage could be meaningful.

What makes the timing awkward is that this shock is hitting a world economy that had not yet finished the disinflation process. It had merely advanced through it. The progress of 2025 mattered, but it was never definitive. Inflation had cooled; it had not been buried. An energy shock of this magnitude need not restart the entire inflation cycle. But it can make the final stretch longer, harder and more uncertain.

Even the benign scenario looks weaker

The OECD has already adjusted its tone accordingly. In its March 2026 Interim Economic Outlook, it projects global growth of 2.9% in 2026 and 3.0% in 2027, assuming the present disruption proves temporary and energy prices begin to ease by mid-year. Even under that relatively forgiving scenario, the organization concedes that the conflict is already weakening global demand and adding fresh inflationary pressure.

For the G20, projected inflation in 2026 is 4.0%. America is expected to grow by 2.0%. The euro area looks weaker still, with growth hovering around 0.8% to 0.9%. This is not yet a world economy falling into recession. But it is one that looks more exposed to policy error, market volatility and renewed tightening in funding conditions.

Central banks are left with less room and more caution

This is where the energy shock collides with monetary policy. On March 18th 2026 the Federal Reserve left the federal-funds rate unchanged at 3.5%-3.75%, while acknowledging that uncertainty remains elevated and that developments in the Middle East may have uncertain implications for both activity and inflation in the United States. The phrasing was measured, as central-bank phrasing usually is. But the underlying point was unmistakable: monetary policy can no longer be read through the domestic cycle alone. Geopolitics has forced its way back into the reaction function.

The European Central Bank sounded much the same note. On March 19th it left rates unchanged and warned that the war had made the outlook “significantly more uncertain”, generating upside risks to inflation and downside risks to growth. It raised its inflation forecast for the euro area in 2026 to 2.6% and cut its growth projection to 0.9%, some 0.3 percentage points below the figure it had published in December.

That alters the policy debate in a fundamental way. The question is no longer simply when rate cuts begin, or how many basis points might be taken off before year-end. It is whether rates may need to remain restrictive for longer because inflation is again being pushed from the supply side. Markets understand the distinction. Central bankers certainly do.

Emerging markets face the nastier arithmetic

If rich economies face a dilemma, emerging markets face arithmetic of a more punishing kind. The IMF has noted that the rebound in oil has come alongside weaker equity markets, higher sovereign yields, a firmer dollar and depreciating emerging-market currencies. For net energy importers, that combination is particularly cruel. Current-account positions worsen. Subsidy burdens rise where domestic smoothing mechanisms exist. And central banks find they have less space to cut rates without inviting exchange-rate instability.

There is also a deeper political problem. When higher energy costs spill into food and fertiliser prices, the shock stops being merely financial and becomes social. Countries with limited fiscal space and weak monetary credibility are poorly placed to absorb imported cost shocks of this scale. That is one reason expensive energy remains such a dangerous variable: it punishes vulnerability.

The challenge is to absorb the shock without amplifying it

So far, policymakers have converged around a broadly sensible instinct. The OECD argues that support for households and firms, where necessary, should be temporary, targeted and designed so as not to undermine incentives for energy conservation. The IEA has gone further, advocating extraordinary measures, including the release of 400m barrels from strategic reserves and steps aimed at reducing demand.

The logic is straightforward. The aim is neither to pretend the shock does not exist nor to smother every price signal it sends. It is to stop an external disruption from metastasizing into something larger: a wider blow to output, household purchasing power and social stability. The task is not to eliminate adjustment, but to prevent adjustment from becoming disorderly.

This is not only an oil story

The simplest mistake is to treat recent events as merely another spike in crude. What has become more expensive is not only energy, but uncertainty itself. When a slowing world economy is hit by a supply shock, capital stops becoming cheaper as quickly as markets had hoped. Businesses grow more defensive. Investors begin repricing risks that, only weeks earlier, seemed to be fading.

That change in tone may be the most important fact of all. Global disinflation is still alive, but it no longer looks smooth or secure. Growth remains positive, but less convincing. Central banks have not lost control, but they have lost some of the room they expected to regain. And markets have been reminded, once again, that the modern world economy still depends on very old things: oil, sea lanes and geopolitical calm.

Epilogue: the last mile just got harder

This doesn’t necessarily herald a full return to stagflation. But it does revive a modern version of the same dilemma: expensive energy, weaker growth and central banks forced into wary, almost defensive caution. The problem is not only that oil has risen. It’s that it has risen just as the world economy was trying to complete the last mile of disinflation.

Recent weeks have delivered a lesson markets tend to relearn only under pressure. Macroeconomic stability depends not just on inflation prints, payroll data or policy rates. It also depends on the world’s key energy arteries remaining open. When one of them narrows or stalls, the price of oil stops being a sectoral detail and becomes, once again, one of the central organizing facts of global economic risk.

Sources

Organisation for Economic Co-operation and Development. (2026, March 26). OECD Economic Outlook, Interim Report March 2026. OECD. (oecd.org)

Organisation for Economic Co-operation and Development. (2026, March 26). Global economic outlook remains robust but has weakened amid energy shock and geopolitical risks. OECD. (oecd.org)

International Energy Agency. (2026, March). Oil Market Report – March 2026. IEA. (iea.org)

International Energy Agency. (2026, March 20). Sheltering From Oil Shocks: Measures to reduce impacts on households and businesses. IEA. (iea.org)

Board of Governors of the Federal Reserve System. (2026, March 18). Federal Reserve issues FOMC statement. Federal Reserve. (federalreserve.gov)

European Central Bank. (2026, March 19). Monetary policy decisions. ECB. (ecb.europa.eu)

European Central Bank. (2026, March 19). ECB staff macroeconomic projections for the euro area, March 2026. ECB. (ecb.europa.eu)

International Monetary Fund. (2026, March 9). Coping and Thriving in a Fluid World. IMF. (imf.org)

International Monetary Fund. (2026, March 20). Press Briefing Transcript: Julie Kozack, Director, Communications Department, March 19, 2026. IMF. (imf.org)