NextFin News - The specter of a 1970s-style stagflationary shock has returned to the heart of Europe as the conflict with Iran threatens to dismantle the fragile recovery of the continent’s largest economy. Torsten Schmidt, head of economic forecasting at the RWI Leibniz Institute for Economic Research, warned on Friday that a conflict lasting longer than four weeks could propel German inflation to a staggering 6% this year. The projection, which doubles the current baseline expectations, hinges on the vulnerability of global energy infrastructure to sustained military disruption.
The arithmetic of this crisis is dictated by the Strait of Hormuz and the integrity of Gulf state energy facilities. According to Schmidt, if Iran continues to target oil and gas installations in neighboring states, the global market will face genuine physical shortages rather than mere speculative volatility. Under such a scenario, crude oil prices are expected to breach the $150 per barrel mark. For a German economy already teetering on the edge of its fourth consecutive year of recession, such a price spike would effectively extinguish any remaining prospects for growth in 2026.
While U.S. President Trump has pledged to protect tanker traffic through crucial maritime chokepoints, the market remains unconvinced. Brent crude has already surged toward $120 per barrel, and domestic fuel prices in Germany are hovering stubbornly at €2 per liter. The immediate impact is a direct hit to household purchasing power, but the secondary effects on industrial production—long the backbone of the German model—could be even more corrosive. High energy costs act as a regressive tax on both consumers and manufacturers, further depressing domestic demand while making exports less competitive on the global stage.
The crisis is not limited to oil. Schmidt expressed particular alarm regarding Germany’s natural gas reserves, which currently sit at a precarious 20% capacity. This level is insufficient to guarantee energy security through the next winter cycle. The current price environment creates a perverse incentive for traders: with spot prices at historic highs, there is little financial motivation to buy gas now for storage. Schmidt characterized this situation as "playing with fire," suggesting that without a state-mandated strategic gas reserve—similar to the existing strategic petroleum reserve—the country remains at the mercy of geopolitical whims.
Central banks are now caught in a pincer movement. In the United States, the Federal Reserve faces a dilemma where the conflict pushes inflation higher while U.S. President Trump maintains pressure for lower interest rates to support the domestic economy. In Europe, the European Central Bank must weigh the necessity of curbing imported inflation against the risk of deepening a recession. If the conflict is resolved by the end of March, RWI expects inflation to settle at a more manageable 2.6% for the year. However, every week the hostilities persist adds a layer of permanence to the price hikes, transforming a temporary supply shock into a long-term structural burden for the global economy.
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