retreated<\/a> from three-year highs on Tuesday after US President Donald Trump expressed confidence in a swift end to hostilities, though Iran\u2019s Revolutionary Guards said they would not allow \u201cone litre of oil\u201d to be shipped from the Middle East if US-Israel attacks continued. And traders remain on edge. Here\u2019s how stagflation risks could play out in markets.<\/p>\nOil blockade<\/p>\n
The epicentre of stagflation fears is the oil-price surge and the key question is how long those prices will remain elevated. Brent crude briefly vaulted to $119.5 a barrel, its biggest daily jump since the 2020 Covid crisis, on Monday.<\/p>\n
Now trading at around $93, Brent is still up 50pc since the year started. European wholesale gas prices hit their highest level in more than three years on Monday. That is bad news for inflation.<\/p>\n
\u201cA 5 per cent rise in oil prices adds around 0.1 percentage points to developed market inflation,\u201d Capital Economics said. High oil prices could also dampen economic growth.<\/p>\n
The International Monetary Fund estimates that for every persistent 10pc oil price rise, a 0.1 to 0.2pc fall in global economic output follows. Oil price surges contributed to US recessions in 1973, 1980, 1990 and 2008.<\/p>\n
Bankers\u2019 dilemma<\/p>\n
This puts central banks in a bind, as rate hikes to restrain inflation could further undermine economic growth. Chicago Fed President Austan Goolsbee told the Wall Street Journal on Friday a \u201cstagflationary environment that\u2019s as uncomfortable as any\u201d could be looming. Markets see about an 80pc chance of a European Central Bank rate hike this year, versus a 40pc chance of a cut before the war. On Monday, they saw two hikes as likely.<\/p>\n
They also see little chance of monetary easing in the UK this year, having earlier priced at least two cuts. \u201cIt seems only retr\u00adeating oil prices could reverse rate hike fears, even with dovish minds at the ECB also stre\u00adssing downside growth risks,\u201d said Comme\u00adrzbank rates strategist Rainer Guntermann.<\/p>\n
The missing link<\/p>\n
That has battered bond markets as investors ditch fixed-income assets, where inflation erodes future returns. Short-dated bonds are the most sensitive. Britain\u2019s two-year gilt yields have shot up by 43 basis points since the war began as of Monday\u2019s close, in light of sticky inflation and flatlining growth.<\/p>\n
German and Australian two-year yields rose around 30 bps in that time, while US two-year yields rose 20 bps. All fell by 3-6 basis points on Tuesday.<\/p>\n
Still, investors are now looking to inflation-linked debt, where both the principal and the interest are linked to the rate of inflation. British five-year breakeven inflation rates \u2014 the difference between inflation-linked and nominal yields \u2014 are up 27 bps since the end of February.<\/p>\n
On Monday, they hit their highest mark since last April. Meanwhile, five-year inflation-linked Treasury yields fell by 2 bps in the last week, compared with a 5-bps rise in nominal yields.<\/p>\n
The Americas vs Europe and Asia-Pacific<\/p>\n
Those wondering whether the market and the economic hit will cause Trump to change course have to remember the stagflationary hit will likely hurt the US less than Europe or Asia.<\/p>\n
\u201cThe US, with the Americas, is self-sufficient in many (of the) commodities being choked off directly or indirectly via (the Strait of) Hormuz,\u201d said Rabobank senior global strategist Michael Every.<\/p>\n
As well as oil, Every flagged fertiliser and helium, important for semiconductor manufacturing. Not surprisingly, US markets have held up better in relative terms. The S&P 500 dropped 2pc last week compared to a 5.5pc fall in Europe and a 6.3pc drop for MSCI\u2019s Asia Pacific ex-Japan index . US bonds also outperformed Germany last week.<\/p>\n
However, the US is not immune to stagflation risks and looked a tad vulnerable even before the energy price spike. The economy unexpectedly shed jobs in February, and data this week is expected to show inflation ticking higher.<\/p>\n
Investors don\u2019t like stagflation because it hurts stocks and bonds \u2014 that aren\u2019t inflation linked \u2014 and even potentially gold, given it does not have a yield. The precious metal dropped 2pc last week and was down again on Monday, though analysts said this was in part selling to make up for losses elsewhere. The only safe haven that has held up since the war began has been the dollar, gaining on nearly every other developed market currency.<\/p>\n
\u201cThe US is a major oil producer and can withstand an oil shock \u2014 though there will be political fallout,\u201d said Kit Juckes, head of FX strategy at Societe Generale. \u201cThe same simply isn\u2019t true of Europe, and the UK in particular.\u201d<\/p>\n
Published in Dawn, March 11th, 2026<\/p>\n","protected":false},"excerpt":{"rendered":"LONDON: Investors are preparing for the possibility that war in the Middle East could spark a stagflationary shock…\n","protected":false},"author":2,"featured_media":333093,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[114,184,85,46],"class_list":["post-333092","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-economy","tag-il","tag-israel"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/333092","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/comments?post=333092"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/333092\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media\/333093"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media?parent=333092"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/categories?post=333092"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/tags?post=333092"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}