“fog of war” refers to confusion and uncertainty on the battlefield and the accompanying possibility of fatal error. This principle also has a parallel when it comes to the economic consequences of wars, especially when they occur in a region that is a choke point for the production and delivery of one fifth of the world oil and a third of its natural gas.
Although no one knows how deep the ripple effects of the wrist are US-Israeli attacks on Iran will harm the global economy, the Gulf kingdom of Qatar issued a dire warning on March 6, 2026, this reflects these concerns: “This will bring down the economies of the world,” Qatar’s energy minister said.
Impact includes one of the biggest oil price shocks in historywhich briefly pushed the price of crude oil to nearly $120 per barrel on March 8. As for the American economy, it was already showing signs of weakness. Data released on March 6 showed a sudden loss at work in February.
like an economistI expect the biggest economic risks of this war to be inflationary pressures and slowing growth due to rising oil prices. In addition, uncertainty from the “economic fog of war” can make consumers reluctant to spend and businesses hesitant to hire and invest.
These conditions will make it challenging for policymakers to steer the economy.
Uncertainty and risks
There is currently, and likely will be for some time, great uncertainty about the duration of the war in Iran, the range of countries involved, and its costs. All these factors will determine how much the war damages the economies in the US and around the globe.
We know there will be interruptions for the supply of oil and liquid natural gas, which is difficult to transport through Strait of Hormuzand from the fiscal costs associated with this military action.
Since March 9, the price of crude oil was just below $90 a barrel, after hitting $118 a day earlier. That’s up from $67 before the US and Israel began bombing Iran on February 28. driving up gasoline prices across the US.
Most of the oil and liquefied natural gas produced in the Middle East travels through the Strait of Hormuz – but the threat of attack has made travel through this waterway unsafe, which has brought transportation through this vital passage to a virtual halt.
This is also an expensive military campaign for the United States, which has already seen this loss of aircraft and exhaustion of its stockpile of missiles. Early cost estimates of the war was nearly $1 billion a day.
Managing a supply shock
The Iranian Revolution of 1979 also brought about an increase in the price of oil, which was an important contributing factor to the US and Europe experiencing an economic phenomenon called “stagflation” – a portmanteau of stagnant growth and high inflation.
This is unlikely to be repeated to the same extent now. Economies are less dependent on oil and natural gas than in the late 1970s and early 80s. And the US is not starting the fight with a previous decade of high inflation that made it harder to reduce price pressures, as inflation expectations feed into actual inflation.
However, supply shocks are challenging to handle, as the world saw with the Covid-19 pandemic, and policymakers will likely have to make some tough choices involving difficult trade-offs.
Trade off between fighting inflation or recession
One of the questions arising from supply shocks is whether a central bank should raise interest rates to fight inflation or cut them to offset weakness in the economy and rising unemployment. Raising rates lowers inflation by reducing demand for credit and curbing growth, while lowering rates has the opposite effect.
Both in the late 1970s and during the onset of the pandemic, the Federal Reserve chose to keep rates low to help support the economy and labor market. In both cases, this led to an increase in inflation.
The inflation of the late 1970s and early 80s was brought down by a sharp reversal of monetary policy with high interest rates, causing a recession that was, at the time, deepest since the 1930s.
In particular, the decrease in inflation in the wake of Covid-19 did not require a similar economic downturn to achieve that goal. An important reason for this is the long history of low inflation in the decades before the 2020s and the “anchoring” of inflationary expectations.
Dangers on the horizon
But there are reasons to worry. While the Fed now has a well-deserved anti-inflation reputation, its credibility in the financial markets is at stake because of President Donald Trump’s attacks on Chairman Jerome Powell, the prosecution of Federal Reserve Board member Lisa Cook and the appointment of a new chair who many suspect will push for lower rates because that’s what the president wants.
Worries that these actions could lead to higher inflation could become a self-fulfilling prophecy that brings about exactly what people are worried about. The seeds of new inflationary pressures may fall on fertile ground.
The uncertainty caused by the war is not the only negative economic signal. Tariff policy, government job cuts, rising federal debt and the possibility of financial weaknesses all are weighing on the American economy.
A rise in the price of oil could trigger further weakness, even a recession, as consumers and businesses pull back on spending.
This article was updated on March 9 with the price of oil.
Michael Klein is a professor of international economic affairs at the Fletcher School, Tufts University
This article was reprinted from Conversation under a Creative Commons license. Read on original article.
