Miles Sklare

May 8, 2026

Just as the pattern of military conflict in the Gulf can be traced by the gradations in crude oil futures, could the US inflation rate also be predicted by the latter? Will the price level be significantly driven upward by  the oil shock of the Iran War? These questions loom large over the upcoming meeting of the Federal Reserve board at the end of this month. The dual mandate–maximum employment and stable prices–which serves as the guidepost for Fed decisions is at an impasse. Shaky job market data coupled with stable consumer spending and business investment suggests a slowing but stable economy in the aggregate, which pushes the Fed to hold or slightly lower rates. On the other hand, rising oil prices by the barrel and at the pump have registered on the CPI as a 3.3% increase in March, the largest acceleration in 2 years [1].

Inflation at the Pump and Beyond: The New Inflation Risk

Rising gas station prices are perhaps the most apparent effect of the war on most Americans. Though the proportion of domestic oil consumption that comes from the strait of Hormuz is quite small, just around two percent, the global nature of the oil market imposes pain at home even if shortages of petroleum are deeply unlikely [2]. These current price increases are largely driven by the crude oil futures market, which is based more on expectations of future production and demand, as well as occasional posts from the President’s social media, than actual oil production costs [3].

Beyond the gas station, oil is a foundational input that affects everything from manufacturing to shipping. Cost increases at the earliest parts of the global supply chain risk spilling over into a more generalized price-push for a variety of goods and services. Perhaps a concerning warning sign of this phenomenon is the fact that for the first time in nearly four years, Chinese manufacturers have registered an increase in producer costs [4]. This is primarily concerning as for years the Chinese manufacturing sector has been undergoing an intense process of cutthroat competition, termed ‘involution’ pejoratively by Xi Jinping. This process has led to a generalized deflation for producers [5]. If the oil shock creates cost-push inflation in areas much more indirect from refined crude, the Fed is certainly more likely to take a harder line on anchoring inflation expectations [6].

In pursuit of price stability, the Fed normally wields interest rate increases as the method to impose disinflation by acting on the aggregate demand channel. By increasing the cost of borrowing, it can bluntly act against consumer and business spending, slowing the overall economy and with it, the growth rate of the price level. Transcripts from recent meetings show that some Fed governors are open to a more hawkish policy of rate hikes, out of concern for the possible inflationary effects of both the war in the Gulf and ongoing tariff concerns [7]. Despite this chatter, it is largely expected for the Fed to keep their policy rate steady at the end of the month, with some 97 percent of Polymarket bettors hedging on this prediction [8]. 

The Dual Mandate Lopsided: Is the 2 Percent Target Ignoring the 4 Percent Reality?

The Federal Reserve maneuvers its policy to target a two percent annualized rate of inflation (the price stability side of the mandate), yet presents a less clear picture of its unemployment rate goal. Theoretically, macroeconomic theories such as the NAIRU (Non-Accelerating Inflation Rate of Unemployment) and the ‘natural rate of unemployment’ underpin Fed thinking on unemployment [9]. In simplified terms, the NAIRU is the hypothetical rate of unemployment that could be sustained with no inflationary pressures [10].

The Fed hesitates to cut rates further out of the rightfully held concern that tariff and oil shock pressures will throw the price level into an unwanted acceleration. However, they largely downplay concerns for the level of unemployment, which sits at around 4.3 percent. The job market is at a stable place, but stable could arguably be substituted with stagnant. Fed chair Jerome Powell highlighted this point, saying explicitly that, “effectively there’s zero net job creation in the private sector” [11]. A rise in rates, even if small, would be contractionary and could negatively affect the already undesirable employment situation. 

Another market likely to be harmed by a rate hike would be the non-bank lending sector, popularly known as private credit. As reported in the Financial Times, the large private credit market–valued roughly at 2 trillion dollars–has been undergoing intense turbulence recently, and would be a concern with possible rate hikes, as it would likely increase defaults [12][13]. The Fed is clearly concerned about this, as it has been actively investigating the extent of large US bank’s exposure to the aforementioned market [14]. Though Wall Street titan Jamie Dimon has raised alarms that even larger losses are yet to come for private credit players, the Fed does not view a down-cycle in the market as being a systemic risk–a risk to the larger banking and brokerage sector and all those who are in transaction with them [15].

The extent of the oil shock will likely depend on the duration of the war

As the US economy sits at a precarious place, stable but not secure, over-increased emphasis on price stability over maximum employment might hamper longer term economic growth and stability, rather than securing it. The extent of the oil shock and its effects on inflation will likely depend on the duration of the war. As this latter fact is unknown, a hasty Fed might do more harm than good if it acts aggressively. The presumptive nominee for the head seat of the Fed, Kevin Warsh, has stated he will pursue rate reductions [16]. While Jerome Powell will officially be out of the big chair in just a month, the situation Warsh might inherit could be a gulf away from the current state of play.

Image Credits: https://www.pickpik.com/filling-station-gas-pumps-gas-vintage-retro-old-144247#google_vignette

Works Cited

[1] Mutikani, Lucia, and Andrea Ricci. “US consumer inflation expected to have surged in March amid Iran war.” Reuters, 10 April 2026, https://www.reuters.com/business/us-consumer-inflation-expected-have-surged-march-amid-iran-war-2026-04-10/. Accessed 14 April 2026.

[2] “Amid regional conflict, the Strait of Hormuz remains critical oil chokepoint – U.S. Energy Information Administration.” EIA, 16 June 2025, https://www.eia.gov/todayinenergy/detail.php?id=65504. Accessed 14 April 2026.

[3] “Crude Oil – Price – Chart – Historical Data – News.” Trading Economics, https://tradingeconomics.com/commodity/crude-oil. Accessed 14 April 2026.

[4] “China’s factory gate prices rise on back of Iran war.” Financial Times, 10 April 2026, https://www.ft.com/content/a56c69bc-97a1-4911-be38-8bccf8f7dcb3?syn-25a6b1a6=1. Accessed 14 April 2026.

[5] “For China, “involution” is a blessing as well as a curse.” Mercator Institute for China Studies (MERICS), 23 October 2025, https://merics.org/en/comment/china-involution-blessing-well-curse. Accessed 14 April 2026.

[6] “Is Iran war fallout hitting US wholesale prices?” Financial Times, 12 April 2026, https://www.ft.com/content/55aad81a-2f0c-473c-89ec-504d0e55fd36?syn-25a6b1a6=1. Accessed 14 April 2026.

[7] “Fed minutes show willingness to consider interest rate increases.” Axios, 8 April 2026, https://www.axios.com/2026/04/08/fed-interest-rates-fomc-march. Accessed 14 April 2026.

[8] Writers data retrieval 

[9] Kliesen, Kevin L., et al. “The NAIRU: Tailor-Made for the Fed?” Federal Reserve Bank of St. Louis, https://www.stlouisfed.org/publications/regional-economist/october-1999/the-nairu-tailormade-for-the-fed. Accessed 14 April 2026.

[10] Extensive criticisms of this concept have been made, but surveying them is beyond the scope of this article

Hüttl, Pia. “Dial N for NAIRU, or not?” Bruegel, 22 May 2017, https://www.bruegel.org/blog-post/dial-n-nairu-or-not. Accessed 14 April 2026.

[11] “Transcript of Chair Powell’s Press Conference — March 18, 2026.” Federal Reserve, 18 March 2026, https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20260318.pdf. Accessed 14 April 2026.

[12] “The $20bn+ exodus from private credit – Investments.” Financial Times, 10 April 2026, https://www.ft.com/content/86b6581f-95c1-4843-83b1-7e0706092bf3?syn-25a6b1a6=1. Accessed 14 April 2026.

[13] Lex, Opinion. “It’s time for private credit’s spring cleaning.” Financial Times, 10 April 2026, https://www.ft.com/content/517fdf8b-b16f-4ba5-bf2a-83871f85c4cb?syn-25a6b1a6=1. Accessed 14 April 2026.

[14] Parashuraman, Preetika, and David Gaffen. “Fed asks about US banks’ exposure to private credit firms, Bloomberg reports.” Reuters, 10 April 2026, https://www.reuters.com/world/fed-asks-about-us-banks-exposure-private-credit-firms-bloomberg-reports-2026-04-10/. Accessed 14 April 2026.

[15] “Subscribe to read.” Financial Times, https://www.ft.com/content/58df968f-de4d-4a00-87b6-0b790057f9d3?syn-25a6b1a6=1. Accessed 14 April 2026.

[16] “Analysis: What might trip up Kevin Warsh and his agenda as Fed chair.” CNBC, 27 March 2026, https://www.cnbc.com/2026/03/27/analysis-what-might-trip-up-kevin-warsh-and-his-agenda-as-fed-chair.html. Accessed 14 April 2026.