Inflation forecasts depend on Hormuz. So does the Fed’s next move.

Subscribe to enjoy similar stories.Watching TV news or listening to most consumers, you’d think the jump in oil prices since the start of the Iran war will send inflation spiraling skyward.Most economists, meanwhile, expect that the impact of higher energy costs on inflation will be relatively trivial. Some even invoke the infamous T word: “transitory.”The truth probably lies somewhere in the middle, even after crude’s 10% selloff on Friday on news that Iran said it would reopen the Strait of Hormuz. Inflation won’t skyrocket, as it did in 2022 to a four-decade peak north of 9%.

But the surge in oil, to a recent $81.50 per barrel from a prewar $65, will prevent inflation from making progress in coming down to the Federal Reserve’s 2% annual target, even after taking out nettlesome food and energy prices.That will keep the central bank’s monetary policy on hold for the months ahead and possibly well into 2027. Even the most strident voices that had been calling for interest-rate cuts now say a wait-and-see stance is preferable, given the ever-changing prospects for ending the conflict with Iran.Economists’ projections for the war’s inflationary impact depend importantly on how soon oil and other key goods resume moving through the chokepoint of Hormuz.

While Iran has declared the strait open, President Donald Trump has said a U.S. blockade of Hormuz is still in place.The war could lead to little more than a rounding error if the strait reopens soon, according to a new paper from the Dallas Fed.