In this article, Raphael Olszyna-Marzys, International Economist at J. Safra Sarasin Sustainable Asset Management, weighs in on the status of oil prices and the US economy, amid the ongoing conflict in Iran.
The war in Iran remains deadlocked. Negotiations continue via Pakistan, but the two sides remain far apart, especially over the nuclear issue. Each appears to believe the “dual” blockade of the Strait of Hormuz inflicts more economic pain on the other than on itself. Although oil price elasticity might be greater than we assumed at the onset of the war – explaining the muted market reaction given the size of the shock – energy stockpiles cannot indefinitely offset disrupted flows. Roughly 10-13% of pre-war supply is still failing to reach global markets. Something will have to give. In the near term, the danger is that oil prices surge as inventories are drawn down to critical levels.
Forecast for the oil price remains at $80-90/bbl
We still expect mounting pressure on both sides to force a reopening of the strait, while negotiations over Iran’s nuclear programme proceed separately. We therefore continue to forecast oil prices at USD80-90/bbl by the end of the year. The path, however, differs from our earlier assumptions: energy prices are likely to remain higher for longer before eventually easing. This revised oil-price profile mechanically lifts our inflation forecasts, which we have generally raised by 0.1-0.2 percentage points. This also implies that central banks will retain their hawkish bias, even if we do not expect them to tighten as much as markets currently anticipate.
The US economy remains resilient
Among major advanced economies, recent data indicate that the US economy remains the most resilient, as expected. Consumption growth has softened, reflecting higher prices and weaker job creation. Yet the economy expanded by 2% in the first quarter, helped in part by strong AI-related capital spending. In addition, as we wrote here, there are growing signs that rising AI adoption is boosting productivity growth, offsetting some of the drag from the administration’s zero-net migration policy and the resulting decline in labour supply. Encouragingly too, labour demand appears to have stabilised and may even be improving, with non-farm payrolls averaging 55,000 over the past three months. That is more than enough to keep the unemployment rate stable, implying that the jobless rate should fall if hiring continues at this pace.
The Fed is likely to remain on hold
Against this backdrop of a stabilising labour market and higher headline inflation rates – _we have raised our 2026 inflation forecast to 3.7%, from 3.5% last month – _Fed officials have again adopted a more hawkish tone. At the last FOMC meeting on April 29, three regional presidents dissented from the decision to retain an easing bias in the statement. A prolonged closure of the Strait of Hormuz could even tilt the bias toward tightening. Any future rate cut under Kevin Warsh, the new Fed chair, therefore, faces a higher bar. Nor do we think that Mr Warch’s argument to Donald Trump – that balance sheet reduction, combined with the disinflationary effects of AI, would justify upfront rate cuts – will carry much weight with other FOMC members. We expect dissent to become the norm, especially if the new chair presses these views too forcefully. Our central forecast: no rate cut this year and just one in 2027. The risks are skewed towards a higher terminal rate.
Inflation in Europe likely to remain above 3% this year
In the euro area, inflation rose to 3% year on year in April, its highest rate since September 2023. Core inflation, at 2.2%, remains close to the ECB’s target. Higher energy prices tend to feed first into food prices and only later into core inflation, so the full pass-through may yet lie ahead. Inflation expectations have already risen sharply. After the previous energy shock, they proved a reliable leading indicator of core inflation. Particularly troubling is the persistence of wage growth and core inflation after the inflation surge of 2022.
Concerns around elevated inflation expectations
Whether this pattern will repeat is unclear. Fiscal and monetary policy are now broadly neutral, whereas both were highly expansionary in 2022. Inflation was close to target before the latest shock, unlike in early 2022, when it was already near 6% before Russia invaded Ukraine. Labour markets are also less tight today: the widespread shortages and pent-up demand for services that followed the pandemic have largely faded. Yet there are reasons for concern. Long-term inflation expectations were lower in 2022 than they are today. It is uncertain whether consumers see successive price shocks as isolated events or begin to treat them as evidence of structurally higher inflation.
The UK economy is weak
The UK faces this new negative supply shock from a position of weakness: sluggish GDP growth, a deteriorating labour market, limited fiscal room and inflation that has yet to return to target. At the start of the war, we argued that investors were pricing in an overly hawkish policy response. Although the Bank’s recent communication has prompted some recalibration, we still think that markets expect too much tightening, even if 2026 inflation is now likely to be slightly higher than we forecast last month (2.9% vs 2.8%). Policymakers will raise rates only once, in June, to signal their determination to keep inflation expectations anchored. We do not expect further tightening after that. By most estimates, interest rates remain restrictive, and second-round effects should be limited, especially if oil prices decline in the second half of the year, as we expect.
