By: Matt Weller, Head of Market Research
Matt Weller and John Kicklighter analyze how the US-Iran conflict and higher oil prices are reshaping inflation and 2026 rate expectations.
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The global interest rate outlook has shifted sharply in recent weeks. What had looked like a gradual extension of the easing cycle in several major economies is now being reassessed on the back of renewed geopolitical tensions, rising energy prices, and the growing risk of stickier inflation. The conclusion was clear: central banks are now facing a more complicated balancing act than they were just a month ago.
The most immediate macro consequence of the conflict has been a surge in energy prices. As a critical artery for global oil and energy shipments, disruption in the Strait of Hormuz has amplified concerns not only about crude supply, but also about the downstream effects on transportation, manufacturing inputs, and broader consumer prices.
The inflation story may extend beyond oil alone. As discussed in the podcast, fertilizer flows are also vulnerable to disruption, raising the prospect of higher food prices at a time when many consumers are still adjusting to the cumulative impact of several years of elevated inflation.
For central banks, this is especially uncomfortable. Even if policymakers typically focus on core inflation measures that exclude energy and food, repeated “one-off” shocks can still shape consumer expectations and behavior in ways that are difficult to ignore.
Source: TradingView
Against that backdrop, major central banks are sounding more cautious. While most have not yet resumed hiking rates, the tone has shifted. The Reserve Bank of Australia stands out for having already raised rates, while the Bank of England and European Central Bank are now being viewed by markets as more likely to tighten policy than previously expected.
Source: John Kicklighter
The Federal Reserve appears less overtly hawkish than some of its global counterparts, but the broader message is similar: rates may stay elevated for longer than markets had expected earlier in the year. In the US, traders have moved from pricing in multiple cuts this year to entertaining an outside chance of rate hikes if the disruption in the Middle East lingers.
Source: CME FedWatch
Crucially, central banks are not simply facing an inflation problem. They are also confronting the possibility that higher energy costs will simultaneously weigh on growth. That tension revives concerns about stagflation, a scenario policymakers are especially eager to avoid.
While major economies remain far from outright stagflation territory, an incremental move in that direction would complicate policymaking significantly.
Ultimately, the durability of this shift may depend on one question: how long the conflict lasts. A short-lived disruption may limit the persistence of inflationary pressure. A prolonged one could reinforce a higher-for-longer rate environment and reshape expectations across FX, fixed income, equities, and commodities.
For now, markets are being forced to recalibrate. And in a global macro environment already sensitive to volatility, that recalibration may prove to be one of the defining themes of 2026.
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