Iran War Could Add 1.5–2 Percentage Points to Inflation Cumulatively in 2026–27

The Iran war’s energy shock could add an estimated 1.5–2 percentage points to cumulative inflation over 2026–27, based on evidence from the United States, United Kingdom and euro area.

The calculation combines evidence from the United States, United Kingdom and euro area, using information available through May. It does not give a separate U.S. estimate, so the 1.5–2-point figure should not be read as the U.S. inflation rate for either year or a forecast of overall price growth. It measures the war shock’s cumulative contribution across 2026 and 2027.

Gradual adjustments in sticky prices — prices that take time to change — account for an estimated 1.2–1.6 percentage points. Higher inflation expectations are estimated to add 0.3–0.4 points in 2027.

Working paper author Ricardo Reis wrote, “These are not forecasts.” His assessment does not incorporate the September U.S. inflation release or calculate how much of that month’s increase was caused by the war.

U.S. consumer prices rose 0.6% in September from August on a seasonally adjusted basis and 3.7% from September 2025 on an unadjusted basis. Energy prices rose 5.2% for the month, including a 9.1% gain in gasoline. Prices excluding food and energy increased 0.3%. The monthly and annual readings use different adjustment bases. Neither the consumer price index release nor Reis’ paper measures the war’s share of that rise.

Another inflation gauge, the personal consumption expenditures price index, rose 3.4% in the 12 months through August; excluding food and energy, it was up 3.0%. Those are observed rates for a different index and period, not estimates of the Iran war’s contribution.

The Federal Reserve raised its target range by 0.25 percentage point in September, to 3.75%–4%, citing elevated inflation. Longer-run U.S. inflation compensation remained relatively stable from June 1 through Sept. 3 despite renewed oil-price swings. That measure covers a period ending before the September CPI release and is distinct from the paper’s estimated change in inflation expectations for 2027.

The paper’s assessment of fiscal policy’s contribution was inconclusive as of May.