Key Findings

  • According to the Wolters Kluwer monthly survey, 59% of business economists believe that the rise in inflation caused by the Iran war will be temporary, and the U.S. economy will only suffer a slight setback, with growth expected at 2.2% this year.
  • However, tensions in the Persian Gulf have prompted economists at Northern Trust, Ford Motor, Visa, and Eaton to raise the probability of a U.S. recession over the next 12 months to 35%. With energy prices rising, they have also pushed back expectations for Federal Reserve rate cuts, with 71% of respondents expecting policymakers to lower borrowing costs only after July.
  • Wolters Kluwer said: "U.S. military action against Iran could both push up inflation and dampen economic growth, and the latest Blue Chip Economic Indicators survey shows shifts in these directions. However, these effects are seen as temporary and not overwhelming."

In-Depth Analysis

Since the outbreak of the war on February 28, the surge in energy prices has not yet transmitted to the broader economy.

Data released by the U.S. Bureau of Labor Statistics last Friday showed that overall inflation (the consumer price index including all categories) rose 0.9% month-over-month and 3.3% year-over-year last month, with the gasoline price index surging 21.2%, contributing nearly 75% of the increase.

Correspondingly, the surge in oil prices prompted 97% of survey respondents to raise their inflation expectations.

However, most respondents expect "the oil price shock to be short-lived, with 59% believing that core inflation will not be transmitted or will only be slightly transmitted," Wolters Kluwer said.

In fact, the core CPI, which excludes volatile food and energy prices, rose only 0.2% month-over-month in March and 2.6% year-over-year (compared to 2.5% year-over-year in February), the Bureau of Labor Statistics said last Friday.

Respondents expect that rising energy prices will prompt the Federal Reserve to slow the pace of monetary easing this year, and their consensus forecast shows the federal funds rate reaching 3.35% by the end of the year, nearly 0.2 percentage points higher than last month's forecast. The current main rate range is 3.5% to 3.75%.

Respondents are far from ruling out the risk of broader inflation.

"Panelists most likely expect the effects of the energy shock to accumulate over time—through weakened real income, higher input costs for businesses, and renewed pressure on global supply chains," said Haver Analytics economists Mike Moran and Sandy Batten in commenting on the survey results. They also noted: "Supply chains could be disrupted, thereby amplifying the impact of higher energy prices on overall inflation, as happened in the early stages of the pandemic."

However, economists believe that compared to the last major oil crisis fifty years ago, the current U.S. economy is far less vulnerable to energy price surges.

Candace Browning Platt, head of global research at Bank of America, noted that in the 1970s, a 10% increase in oil prices raised inflation by 0.9 percentage points; since then, that impact has fallen to 0.25 percentage points. "The impact on economic growth is even smaller," she said, estimating that a 10% rise in oil prices today would only reduce GDP by 0.05 percentage points, compared to 0.7 percentage points in the 1970s.