Since the Iran war began, the market narrative has been simple: the oil spike, inflationary impulse and wider market volatility will be temporary and die down once the conflict halts, allowing central banks to grease the economy and markets with easy money, as they have consistently done post-2008.
But there is a counter view that says scars from the Iran war will persist for long in the form of a structurally elevated global inflation floor. This could impact returns across all asset classes, including stocks, crypto and bonds.
The answer to that lies in the biggest takeaway from the Iran war: energy markets are fragile, and major economies are exposed to oil price spikes and energy supply disruptions.
For decades, several countries, including major economies, relied on global energy supply chains, price-driven markets, and comparative advantage. That model worked, but it has now crumbled amid the latest disruption in the Strait of Hormuz, which has led to massive energy shortages across the world, including in major economies like India, Japan and South Korea. If the conflict drags on, eventually countries like China, which have sizeable reserves, could suffer too, including the supposedly energy-independent U.S.
The result: Going forward, every nation is likely to make energy independence and security central to its national security strategy.
According to Energy Market Expert Anas Alhajji, this trend will trigger rapid de-globalisation of energy markets, prioritising control over cost and breeding sticky inflation.
“Once that mindset takes hold, global energy markets will never return to the old model of open, price-driven, largely commercial trade. Instead, capitalist economies—historically reliant on market efficiency, global supply chains, and comparative advantage—will increasingly mirror the Chinese approach: heavy state direction, strategic stockpiling, vertical integration, subsidies for domestic champions, and prioritization of self-reliance/control over pure cost minimization,” he said in an explainer on X.
He added that most nations lack China’s centralized supply chain, industrial base, and decision-making, which could result in slower innovation, fragmented markets, and higher costs.
“The result: higher costs, slower innovation in some areas, fragmented markets, and reduced overall efficiency for Western-style economies, all in the name of ‘security.’ Energy stops being just another commodity; it becomes a geopolitical weapon and a domestic fortress,” he noted.
In other words, the impact of the Iran war goes beyond the short-term oil price volatility.
There are already signs of widespread fallout, affecting everything from fertilisers and food production to industrial production and perhaps even chipmaking and the semiconductor industry, as the disruption in the Hormuz Strait chokes off supplies of helium and sulfur, which are crucial to chipmaking.
On top of that, the UN has already warned of higher food prices worldwide.
Impact on assets
All this means is that central banks may no longer have the room they once had to turn on the liquidity tap quickly to support the economy and asset prices.
From 2008 to 2021, the global consumer price index (CPI) or inflation rate averaged under 3% (briefly rising to 8% in 2022, only to fall back to 3% in 2024), according to data source St. Louis Fed. This allowed central banks, including the Fed, BOJ and others, to pursue ultra-easy monetary policies that set interest rates at or below zero, and pump liquidity via aggressive bond buying or quantitative easing, fueling epic gains across all markets. Bitcoin, for one, went from a single-digit dollar-denominated price in 2011 to $126,000 in October last year.
But with an expected structurally higher inflation floor, that paradigm shifts. Central banks can no longer assume they can always cut rates to drive growth. Liquidity could be more constrained, capping returns across asset classes.
The message is clear: Investors should brace for a world where inflation is sticky, monetary policy is less accommodative, and market volatility is the new normal.