• The European Union is slashing growth forecasts and raising inflation projections, citing a stagflationary shock from the Iran war.
  • Oil prices above $100 and strained Strait of Hormuz shipping are fueling weaker demand and persistent price pressures.
  • Prolonged conflict could keep energy bottlenecks until 2027, limiting policy flexibility.

Stagflation Fears Resurface

The European Union is set to cut its growth forecasts and lift inflation projections, warning that the Iran conflict is delivering a stagflationary shock to the bloc's economy. EU Commissioner Valdis Dombrovskis said that oil prices above $100 and disrupted shipping via the Strait of Hormuz are driving weaker growth, higher inflation, and limited room for policymakers to respond.

In a short-run scenario, EU output could be trimmed by about 0.4 percentage points this year. If the disruption persists, the hit could reach 0.6 points in 2026 and 2027, with energy prices staying elevated, according to people familiar with the matter.

Transmission Channels

Brent crude has surged above $100 in the recent shock, and higher fuel and freight costs are feeding into household budgets and industrial inputs. The pattern is classic stagflation: weaker demand growth alongside stubborn inflation. The main transmission channel is oil and gas, with diesel particularly sensitive due to its link to freight and industrial activity.

“This is a direct macro risk for Europe, not just a security issue,” one official said. The EU has warned that prolonged conflict could worsen energy bottlenecks and keep pressure on inventories and prices into 2027.

Policy Dilemma

The warning highlights a policy dilemma: central banks can fight inflation, but they cannot easily fix an energy supply shock without worsening growth. Some analysts have drawn parallels with the 1970s oil shocks, when geopolitical disruptions produced high inflation and weak growth simultaneously.

In the short term, the key variables are whether shipping through Hormuz stabilizes and whether oil prices retreat. Without a deal, energy-security intervention and tighter inventory monitoring are likely. The broader international implication is that the Middle East conflict is now being treated as a direct macro risk for Europe.

Consumer Burden

Consumers face the clearest near-term effect through higher fuel, heating, and transport costs. Businesses with heavy logistics exposure or energy-intensive production are most vulnerable. The burden usually falls hardest on lower-income households, which spend a larger share of income on energy and essentials.

Public debate is likely to center on whether governments should cushion prices, accelerate energy diversification, or prioritize inflation control. “It’s a great country to invest here because there are a lot of very good companies,” one private equity executive said, but the stagflation risk is now front and center.

Correction: An earlier version of this article misstated the potential output hit for 2026; it is 0.6 percentage points.