Fresh analysis from the Dallas Federal Reserve Bank suggests that an extended disruption to global oil flows through the Strait of Hormuz could lift headline U.S. inflation well above 4% by the end of the year, with even larger, short-lived leaps possible sooner.
The working paper, published Tuesday, examines several closure scenarios for the Hormuz - a chokepoint that handles roughly 20% of the world’s oil and which the researchers say has been effectively closed for five weeks - and translates those disruptions into projected changes in headline and core inflation as well as household inflation expectations.
Under a brief, one-quarter closure scenario, the study estimates that annualized inflation in March could jump by 5.2 percentage points. That surge would fade quickly, leaving fourth-quarter inflation elevated by about 0.35 percentage points compared with the baseline.
By contrast, a longer, three-quarter shutdown would have a far larger year-end effect. The researchers calculate that a nine-month closure would lift the price of oil from a current level of $115 a barrel to $167 a barrel and raise fourth-quarter inflation by as much as 1.8 percentage points.
Year-over-year inflation as gauged by the personal consumption expenditures price index was 2.8% in January; the Federal Reserve’s formal target is 2%. The paper also isolates likely movements in core inflation, which excludes food and energy. A one-quarter closure of the Hormuz would add roughly 0.18 percentage points to core inflation, while a three-quarter closure would add about 0.49 percentage points. Core inflation measured 3.1% in January.
The Dallas Fed researchers also address inflation expectations, an important focus for U.S. central bankers. Their findings: household expectations for one year ahead could climb by up to 0.8 percentage points in some scenarios, but longer-horizon expectations - the five- to 10-year measures that policymakers watch most closely - would increase by no more than 0.09 percentage points.
"There is little evidence of higher gasoline prices being passed through to core inflation or long-run inflation expectations becoming unanchored," the researchers wrote, underlining that the observed pass-through to measures that drive monetary policy appears limited in their simulations.
The paper’s timeframe and scenarios come amid heightened tensions in the Middle East. On Tuesday, the study was released as the situation in the region appeared close to a major escalation after U.S. President Donald Trump called on Iran to open the Strait of Hormuz or face the destruction of its power plants and bridges.
Methodology and scope
The working paper lays out the likely inflationary consequences across several modeled scenarios for disruptions to the Hormuz. It translates disruptions into oil price paths and then into headline and core inflation effects and changes in short- and long-run household expectations. The authors emphasize the size and duration of the closure as the primary determinants of the inflationary outcomes.
Implications
The simulations indicate that while headline inflation could spike substantially with a significant and prolonged cutoff of supplies through the Hormuz, the likely effects on core measures and on long-term expectations are materially smaller under the modeled scenarios.
Note: The paper models potential outcomes under specified closure durations and reports the resulting projected impacts on inflation and expectations as described above.