• Global inflation expectations are rising amid unresolved U.S.-Iran tensions, increasing the likelihood of interest rate hikes by the Federal Reserve and other central banks.
  • Oil price sensitivity to geopolitical risks is reinforcing concerns about sustained inflation, pushing back rate-cut timelines into 2026 or beyond.
  • Even modest signals of tighter policy could shift currency markets and commodity prices, forcing central banks to align to avoid inflationary spillovers.

Hawkish Winds Return

Inflation expectations are heating up globally as the U.S.-Iran conflict rattles energy markets, reigniting fears that central banks may need to hike rates further rather than cut them. According to Bob Savage, the risk of a return to tighter policy is mounting, and even subtle signals could reshape global expectations. “The unresolved geopolitical tensions are keeping energy costs elevated, which feeds directly into inflation,” Savage said. “Central banks are now caught between slowing growth and sticky prices.”

The Fed, in particular, faces a delicate balancing act. With oil prices sensitive to every escalation, the path to rate cuts has become murkier. Markets had priced in a pivot later this year, but the latest data suggests that timeline may slip well into 2026. “If inflation remains stubborn, the Fed will have no choice but to keep rates higher for longer,” said one analyst familiar with the central bank’s thinking. “A rate hike isn’t off the table.”

Global Ripple Effects

The implications extend beyond the U.S. Other major central banks are watching closely, as dollar-priced commodities amplify inflationary pressures. A tightening bias in the U.S. could force peers to follow suit to defend their currencies and prevent import-driven price spikes. “We’re seeing a synchronization risk,” noted a senior economist at a European research institute. “If the Fed moves, others will have to move too, or face capital outflows and higher import costs.”

Oil and energy prices remain the wildcard. Recent attacks on tankers in the Strait of Hormuz have already caused brief spikes, and any further disruption could push inflation expectations even higher. “The market is pricing in a risk premium that won’t disappear until there’s a clear de-escalation,” said a commodities strategist. “Until then, the pressure on central banks is relentless.”

What’s Next?

For now, the consensus among economists is that rate cuts are unlikely until inflation shows sustained signs of easing. Borrowing costs for consumers and businesses are expected to remain elevated, slowing growth in energy-dependent economies. The Fed’s next meeting in June will be closely watched for any hawkish shifts in language. Attempts to reach Savage for further comment were unsuccessful, but his warning lingers: the risk of rate hikes is real, and the window for cuts is narrowing.

Correction: An earlier version of this article misstated the timing of potential rate cuts as 2025; it has been updated to reflect current market expectations of 2026.