As markets continue to assess the implications of the ongoing US-Iran conflict, attention has largely focused on energy prices and disruption to global supply chains. In this analysis, Michael Browne, Global Investment Strategist at Franklin Templeton Institute, explores how the longer-term economic consequences may be felt elsewhere.
When the US-Iran conflict started, we indicated that second-round effects would include rising energy prices, but that the most important thing for the consumer would be food prices. Energy is part of the cost of every step of producing, harvesting, storing, distributing and selling food. While we feel some impact in the immediate season, we will also see an impact in the following season because of the rise in fertiliser and feed prices, which may cause significant future production declines and price increases.
But are these concerns exaggerated? After all, while oil prices are up over 60% year-to-date (YTD), agricultural prices have been much more subdued. Wheat prices have risen while cattle prices are at best flat in the United States. In Europe, beef prices have fallen back to 2025 levels, while wheat prices are virtually unchanged.
Looking out to 2027, forecasts suggest food production may fall, and perhaps significantly in some areas, such as beef and wheat, as markets correct for an oversupply from 2026. Although price shocks for fertiliser and broader energy supplies are likely to continue, the fact that current crop prices are flat (giving no incentive for higher production) means that supply may fall further.
Still, it appears that consumer prices in the second half of 2026 are unlikely to rise as much as they did in the first half (or in the memorable price surge of 2022), partially because there was already a consumer-price squeeze last year.
As food is the critical component of secondary price effects, that suggests that we might find ourselves with lower-than-expected inflation this coming September and October. In the United States, where there will also be some positive base effect in inflation data caused by comparisons to the price increases that accompanied last year’s tariffs, the impact on price readings might be greater than we think and could even restart the rate cut conversation.
If we get to that point, it may give more attention to a question that is currently under debate: How much does the Strait of Hormuz matter? Can we survive without so much commercial traffic through the channel? Sure, prices have risen a bit, but life seems to go on, in particular with the artificial intelligence (AI)-driven, ‘K-shaped’ economy.
Can we actually ignore the Persian Gulf shipping crisis? Leaving aside any geopolitical implications it could have, we need to consider two factors. The first is the liquefied natural gas (LNG) supply for Europe. There is plenty of LNG in the United States, but getting it to Europe is not possible, as the export infrastructure does not exist. Hence, the price of LNG YTD is down 10% in the United States and up 72% in Europe.
Can Europe find enough LNG to offset the losses from Qatar? The purpose is to restock for a winter where all weather bets are off because of the return of an El Niño seasonal pattern. (The science is not clear in predicting whether the effect on Europe will be warmer and drier or cooler and wetter weather.)
The expectation is that Europe will not be able to restock LNG, but we will not know until September, so there is still just enough time for a resolution of the conflict to enable restocking. This uncertainty has a significant impact on inflation for Europe, but not for the United States.
Looking to next year, expectations are already appearing for lower agricultural planting rates in 2027 due to current low farm profitability. That would raise the prospect of higher food price inflation in 2027, which would likely be universal.
Is what we are looking at a delayed reaction to the impact of the current US-Iran war? For now, the impact seems to be delayed by moderate food prices; could alternative supplies of oil and even LNG delay the effects even further? But then, would the impact catch up with us all in 2027?
