Bank of America analysts are projecting slower growth, higher inflation, and $100 per barrel oil all year as a result of the Iran war — even if it ends within weeks.
“The war dividend so far: mild stagflation,” BofA economist Claudio Irigoyen and his team wrote in a note on Wednesday, referring to the economic phenomenon of higher inflation coupled with slower growth.
The economists said that while the world economy is less dependent on oil, it has become much more sensitive to natural gas and fertilizers. This represents a major risk for Europe and developing economies.
“The Iran war is not an oil shock — it is an energy shock,” Irogoyen wrote.
The economists predict US growth will take a 50 basis point hit to 2.3% for 2026. Headline inflation is now forecast to reach 3.6% in 2026, up from 2.8%. Globally, the economists also revised down gross domestic product to 3.1% and raised inflation expectations to 3.3%.
“This is consistent with a stagflationary shock that would impact inflation earlier and more prominently than GDP growth, based on our new base case with oil prices remaining close to $100/bbl for the rest of 2026,” Irigoyen wrote.
Read more: How oil price shocks ripple through your wallet, from gas to groceries
BofA’s analysis assumes the war winds down by the end of this month.
If the conflicts escalate and drag on, however, the impact of “much higher energy prices, coupled with a significant correction in asset prices, could lead the global economy into a recessionary scenario,” Irigoyen wrote.
Read more: What is a recession, and how does it impact you?
The economists still expect the Federal Reserve to cut rates by 50 basis points this year, but those cuts have been pushed back from summer to fall, with acknowledgment of “high risks that these cuts may not materialize.”
Wall Street has increasingly delayed rate cut expectations, with Goldman Sachs also predicting two 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 on Wednesday.
“Against this backdrop, an oil shock large enough to trigger concerns about persistent inflation would probably also cause significant economic damage and potentially a recession,” they added.
Earlier this week, Fed Chair Jerome Powell stated that inflation expectations are “well anchored” and that the “tendency is to look through any kind of supply shock.” His comments eased growing concerns about a surprise rate hike later this year.