CHARLOTTE, N.C. — Economists at Bank of America are warning that the war involving Iran could slow economic growth and push inflation higher through 2026, even if the conflict ends within weeks, according to a research note released Wednesday.
“The war dividend so far: mild stagflation,” wrote Claudio Irigoyen and his team, referring to a combination of slower growth and rising prices.
The economists said the global economy, while less dependent on oil than in previous decades, has become more sensitive to disruptions in natural gas and fertilizers, creating heightened risks for Europe and developing markets.
“The Iran war is not an oil shock — it is an energy shock,” Irigoyen wrote.
New Projection
Bank of America projects U.S. economic growth will slow by 0.5 percentage points to 2.3% in 2026, while headline inflation is expected to rise to 3.6%, up from a prior estimate of 2.8%. Globally, economists lowered their growth forecast to 3.1% and raised inflation expectations to 3.3%.
The outlook assumes oil prices remain near $100 per barrel for the rest of 2026, a scenario the economists say would produce a stagflationary shock in which inflation rises faster than economic output slows.
If the conflict escalates or persists, however, the consequences could be more severe.
“Much higher energy prices, coupled with a significant correction in asset prices, could lead the global economy into a recessionary scenario,” Irigoyen wrote.
Rate Cut Still Expected
The economists said they still expect the Federal Reserve to cut interest rates by 50 basis points this year, but those cuts have been pushed back from the summer to the fall, with “high risks that these cuts may not materialize.”
Other Wall Street firms are also adjusting expectations. Analysts at Goldman Sachs said they now anticipate two rate cuts in the fourth quarter.
“The labor market is softening, wage growth is already below the pace that would be consistent with 2% inflation, and inflation expectations are well anchored,” Goldman Sachs analysts wrote.
Muted Inflation Concerns
They added that an energy-driven inflation shock large enough to raise concerns about persistent price increases would likely also inflict broader economic damage and could trigger a recession.
Earlier this week, Federal Reserve Chair Jerome Powell said inflation expectations remain “well anchored” and suggested policymakers would likely look past temporary supply shocks, easing concerns about a potential rate hike later this year.
