Capital Economics: Economic implications of escalating Iran-Israel conflict

The ongoing escalation between Iran and Israel could have several economic repercussions, most notably a surge in oil prices as well as shipping costs amid heightened tensions in the Strait of Hormuz, said Capital Economics in a report. However, the full impact remains uncertain, the report added.

The most significant effect will likely stem from rising oil prices, which increased 13% since the onset of the conflict. Yet, they remain below a year-ago level.

Capital Economics projected that if Iran’s oil production or export infrastructure were to be targeted, Brent crude could climb to $80- $100 per barrel. This potential spike might prompt OPEC to raise output, which could help mitigate the inflationary effects on oil prices. Still, any inflationary pressure would likely urge central banks to adopt a more cautious approach toward interest rate cuts.

Further instability in the Strait of Hormuz would drive shipping costs higher. Freight rates have already increased earlier this year due to Middle East tensions, forcing vessels to reroute away from the Red Sea. Capital Economics, however, expressed doubt that such increases would have a significant effect on global inflation.