The closure of the Strait of Hormuz during the 15-week US-Iran conflict caused energy prices to spike and disrupted global trade. By late March, the EU had flagged stagflation risks as euro area quarterly GDP slowed to +0.1% quarter-on-quarter, below consensus, with soaring energy costs cited as the main driver. Consequently, the ECB delivered its first rate hike since 2023 at its June meeting. Meanwhile, new Fed Chair Kevin Warsh surprised markets by adopting a hawkish tone at his first June meeting, making it clear that his priority was to fight inflation despite political pressure to lower interest rates.
On 15 June, the US and Iran announced that they had reached an interim peace agreement. The deal opened a 60-day negotiating window on Iran’s nuclear programme and committed both sides to reopening the Strait of Hormuz. Hopes that key shipping routes could reopen helped drive a sharp fall in energy prices. This eased concerns about an inflation shock and reduced fears that central banks would need to pursue a more aggressive tightening cycle.
During the conflict, most research analysts incorrectly predicted that crude oil prices would surge above USD 150 per barrel if the war dragged on. They warned that dwindling reserves would be unable to meet demand, repeatedly identifying a critical tipping point first at the end of April, then May, then June, while fearing an outright crisis by the third quarter. In the event, prices never reached the extreme levels they had warned about. Few had anticipated the extent to which China would cut its oil imports — by roughly 4 to 5 million barrels per day compared with a year earlier. Although Chinese oil reserves are opaque, they proved to be a powerful buffer. Following the signing of the Memorandum of Understanding (MoU) between the US and Iran, prices returned to pre-conflict levels much faster than expected.
Stagflation fears have eased significantly following the geopolitical de-escalation. Recent updates from the Federal Reserve and solid data suggest the economy is avoiding the toxic combination of high inflation and stagnant growth. Lower energy prices will ease pressure on headline inflation while also supporting the growth outlook by partially unwinding the squeeze on household real income. Although second-quarter hard data will still reflect the earlier rise in energy prices, forward-looking indicators have already become more encouraging. In the US, the S&P Global Manufacturing PMI reached 55.7 in June—well above consensus expectations and supported by the strongest growth in new orders—signalling renewed momentum amid a surge in AI-related investment. In the euro area, the economy remains fragile, but there are also signs of improvement. The Consumer Price Index fell to 2.8% from 3.2%, driven entirely by the reversal in energy prices, and consumer confidence has risen, although it remains in negative territory.
US and Iranian officials are still debating the terms of the US-Iran MoU, and a breakdown in negotiations leading to a renewed closure of the Strait of Hormuz would represent a severe risk. Even so, this remains an unlikely worst-case scenario, and for now the stagflationary tail risk (a prolonged surge in inflation combined with a collapse in growth) has been avoided. Another important lesson is that global oil supply is structurally far more flexible and adaptive than many had expected.
Date of report: July 8th of 2026