The real issue now for the world economy is the inevitable global shortages of essential commodities, not just oil, but oil products like air fuel and a whole range of raw materials needed to sustain agricultural and industrial production through this year.
Michael Roberts is an Economist in the City of London and a prolific blogger Cross-posted from Michael Robert’s Blog Last week, crude oil prices in Asia hit a new high at $125/b amid reports that the US was considering military action against Iran to break the deadlock in peace talks. The global average oil price also reached $113/b, the highest since the post-COVID pandemic slump in 2022. In the end, Trump backed off (for now) from that threat and said that ‘peace talks’ were still underway. But he asserted that the US will maintain its naval blockade until a ‘nuclear agreement’ is reached, further weakening prospects for a peaceful resolution. Oil prices edged back a little, but remained well above $100/b as the war went into its third month. The Strait of Hormuz remains blocked, with nearly all shipping unable to transit it. The real issue now for the world economy is the inevitable global shortages of essential commodities, not just oil, but oil products like air fuel and a whole range of raw materials needed to sustain agricultural and industrial production through this year. Already US oil inventory data show steep declines in crude and fuel stockpiles JPMorgan economists reckon that global oil inventories will hit Operational Floor by September. “Operational Floor” is the minimum needed to keep global oil production functioning. Below it and pipelines lose pressure, terminals shut and refineries go offline. The World Bank released its latest Commodities Outlook report and it makes alarming reading for the world economy, especially for the poorest countries and their people. Energy prices are projected to surge by 24% this year to their highest level since Russia’s invasion of Ukraine in 2022. Overall commodity prices are forecast to rise 16% in 2026, driven by soaring energy and fertilizer prices and record-high prices for several key metals.
Attacks on energy infrastructure and shipping disruptions in the Strait of Hormuz, which handles about 35% of global seaborne crude oil trade, have triggered the largest oil supply shock on record, with an initial reduction in global oil supply of about 10 million barrels per day. Even after moderating from their recent peak, Brent oil prices remain more than 50% higher in mid-April than they were at the start of the year. Brent oil is forecast to average $86 a barrel in 2026, up sharply from $69 a barrel in 2025 (and this forecast was made before the latest hike up in the crude price and assumes that the most acute disruptions end in May and that shipping through the Strait of Hormuz gradually returns to pre-war levels by late 2026).
Indermit Gill, the World Bank Group’s Chief Economist concluded that: “the war is hitting the global economy in cumulative waves: first through higher energy prices, then higher food prices, and finally, higher inflation, which will push up interest rates and make debt even more expensive,” He went further: “The poorest people, who spend the highest share of their income on food and fuels, will be hit the hardest, as will developing economies already struggling under heavy debt burdens. All of this is a reminder of a stark truth: war is development in reverse.” Rising commodity prices caused by these shocks will increase inflation and destroy economic growth worldwide. In developing economies, inflation is now projected to average 5.1% in 2026 under the World Bank’s ‘baseline’ assumptions—a full percentage point higher than was expected before the war and an increase from 4.7% last year. Growth in developing economies will also deteriorate as higher prices for essentials weigh on incomes and exports from the Middle East face sharp curbs. Developing economies are expected to grow by 3.6% in 2026, a downward revision of 0.4 percentage point since January. Economies directly impacted by conflict will be hardest hit, and 70% of commodity importers and more than 60% of commodity exporters worldwide will see weaker growth.
Critically, these effects spill over into other key commodity markets, with an impact roughly 50% larger than under normal market conditions. According to the World Bank, a 10% oil price increase triggered by a geopolitical supply shock leads to natural gas price increases peaking at about 7% and fertilizer price increases peaking at over 5%. This will feed through to prices in the shops and the bills of households around the world. The fertiliser shock is already under way. The plunge in crop yields will come in the autumn. If fertiliser prices rise from roughly $300–$350 a tonne to around $900–$1,000 and remain elevated, global food prices could increase by 60-100%, pushing up to 100mn additional people into undernourishment — a far larger impact than disruptions to grain trade alone. As I have argued in previous posts , stagflation (ie slowing real GDP growth and rising inflation), had already been emerging well before the Iran conflict broke out. The war has only accelerated that process – the major economies are like a pair of scissors; the bottom blade (growth) is dropping further while the upper blade (prices) is rising faster – so the gap between the blades is widening. US consumer inflation (PCE index) reached 3.6% yoy in April. PCE inflation has been moving up relentlessly for the past 10 months, and the energy price spike will now add to that in future months. So even the US is facing stagflation. Trump’s continued tariff tantrums are only adding to the inflationary pressure. The US Federal Reserve reckons that tariffs have resulted in a “ near-complete pass-through to consumer prices, contributing roughly 0.8 percentage points to core PCE inflation and explaining the excess inflation in core goods.” Given the stagflationary economic environment intensified by the Iran war and rise in energy and commodity prices, central banks are in a dilemma – raise or cut interest rates? So far, they have decided to do neither.
Last week the US Fed kept its federal funds rate unchanged at the 3.5%–3.75% target range for a third consecutive meeting. But the decision was not unanimous, with Governor Miran (Trump’s man on the board) voting to lower interest rates by 25bps and three other members objecting to the language in the statement that suggested the central bank would eventually resume cutting rates. The 8-4 vote marked the first time since October 1992 that four officials dissented against a FOMC decision. This split joins a similar split by the Bank of Japan earlier in the week, when its board members held its short-term policy rate at 0.75% at its April 2026 meeting (the highest level since September 1995). But three bank board members voted for a hike in the rate.
In the Eurozone, stagflation is already confirmed. Eurozone real GDP rose just 0.1% from the previous quarter in the first quarter of 2026, so that year-on-year real GDP growth slowed to just 0.8%, the slowest rate of expansion since 2022. Yet Euro area annual inflation climbed to 3% in April 2026, the highest since September 2023. Energy costs soared 10.9%, the most since February 2023. The European Central Bank was left in quandary about raising or reducing its interest rate. It decided to do nothing and kept interest rates unchanged.
Within the Eurozone, France is in deep in stagflation. Real GDP stalled quarter-on-quarter in Q1 2026,, marking the weakest performance in five quarters, and household consumption and investment declined and exports fell sharply. In the UK, t he Bank of England reckons that in its ‘worst case scenario’, now looking increasingly likely, inflation could hit 6.2% by the start of 2027! Food prices could rise by 6-7% by the end of this year. This could lead to significant rises in the BoE base interest rate as the central bank tries to ‘control’ inflation. Average real incomes in Britain will fall (low-income households will suffer most, as usual) and the economy will stagnate. Unemployment will rise as food and hospitality businesses see a reduction in demand and are forced to lay people off.
Globally, if the conflict lasts much longer, then rising inflation will be joined by falling economic growth and the likelihood that even some of the major economies could slip into an outright slump. Stagflation is here now, but ‘slumpflation’ is on the horizon.
The war will also intensify the widening gap between the rich elite and the rest of us. In the US, this gap is called a “K-shaped” economy , namely the better-off get richer and the worse-off get poorer. A new report by Oxfam shows that the inequality gap in global pay has widened dramatically through the 2020s. When adjusted for inflation, global worker pay declined 12% between 2019 and 2025, the equivalent of 108 days of free work during that time period. In comparison, chief executive officer (CEO) ‘compensation’ increased by 54% between 2019 and 2025. CEO pay increased 20 times faster than average worker pay around the world in 2025. Four of the world’s biggest companies — Blackstone, Broadcom, Goldman Sachs and Microsoft — paid their chief executives more than $100 million each in 2025. The payouts place these bosses among the highest earners globally, with the top 10 CEOs together taking home more than $1 billion last year. The average CEO received $8.4m in total compensation in 2025 compared to $7.6m in 2024.
The Oxfam analysis also found billionaires were paid $2,500 a second in dividends in 2025, according to the investment portfolios of more than 1,000 billionaires. For every two hours in the 2025, the average billionaire received more in dividends than the average worker earned in annual pay. The wealth of billionaires reached a record high in 2026, with the wealthiest gaining $4tn over the past 12 months, a 13.2% increase from 2025. Inequality in the US was worse than the global average, with CEO pay increasing 20.4 times faster than worker pay in 2025. For 384 CEOs in the S&P 500 where CEO compensation data was available, pay increased by 25% from 2024 to 2025, while average hourly earnings for workers at private companies increased just 1.3% in the same period.
The labour share of GDP is a measure of how much economic value goes to workers. Globally, labour share as a percentage of GDP has declined by 0.4 percentage points since 2019. If labour share had stayed at 2019 levels, workers would have been $469 billion better off in 2025. Since 2019, productivity has increased by 9% while real wages have fallen by 12%. The share of US national income going to capital has rocketed in the 21 st century. Source: John G. Fernald, “A Quarterly, Utilization-Adjusted Series on Total Factor Productivity.” FRBSF Working Paper 2012-19. My calculations. Indeed, this is why the US stock market continues to boom despite the intensifying crisis in the productive sectors of the economy globally. In April, US stocks had their biggest rise since the coronavirus pandemic, as strong earnings and plans for further huge spending on AI persuaded investors to shrug off concerns over the fallout from the US-Iran war. The rise was almost entirely due to technology stocks. Investors piled back into US tech stocks as analysts revised their profit forecasts to new highs. As has been said before, the US economy is one big bet on AI. Investors are banking on booming AI infrastructure spending by a handful of Silicon Valley companies to support economic growth. And the AI spending boom shows no sign of abating. The big four “hyperscalers”, which include Amazon, Meta, Microsoft and Google parent Alphabet, are together expecting to spend 77 per cent more in capital expenditures than a record $410bn last year to a staggering $725bn. Will AI deliver in creating a step-change up in the productivity of labour in the US that will overcome the downward pressure on economies and on the profitability of capital in the major economies? So far, there is little sign of any productivity boost. Productivity expert Carl Frey reckons that those promoting AI would be lucky to see the technology’s impact on output per hour match even the short-lived burst of the 1990s and 2000s. It costs around $30 million in AI hardware) and $14 million per megawatt of data center capacity. Data centers appear to take anywhere from a year to three years depending on the size. Of the 114GW of data centers supposedly being built by the end of 2028, only 15.2GW is under construction in any way, shape, or form . As a result, every AI data center starts millions of dollars in the hole, and even with six-year-long depreciation schedules, takes years to pay off. Open AI reckons it will make $673 billion in revenue through the end of 2030, but it is burning $852 billion in cash raised from loans and contracts to get there. At the same time, competitor AI companies, mainly in China, are providing open source AI machines that dramatically undercut prices being charged by the American firms. Many investors in so-called ‘private credit’ (non-bank credit funds) that have been investing in AI are demanding their money back. If central banks decide to raise intereest rates on borrowing to try and control rising inflation, that could trigger corporate defaults and a squeeze on private lenders. So the jury is still out on whether AI will succeed in boosting productivity and delivering sufficient profit before the investment bubble bursts.
And then there is the cost of the Iran war. This war is costing the American state over $1 billion a day. The Trump administration has already dramatically increased the “defence” budget to over $1 trillion a year, but even after just a few weeks, the war is using up a sizeable part of the weaponry and logistics available. This is squeezing what is required to continue the Ukraine war as a result. Already Ukraine’s President Zelenskyy is complaining of the lack of funding and arms that he needs to sustain the frontline against the Russians.
Global military spending hit a record $2.9 trillion in 2025, marking 11 straight years of growth, as major powers like the US, China, and Russia ramp up budgets. Europe is also increasing budgets in response to the war in Ukraine. Source: SIPRI
The Trump administration is now asking the US Congress for a 50% increase in US defense spending for the next year to $1.5trn. In Europe and Japan, ‘defence’ spending is also set to rise sharply. This will add to already record-high public debt in the US and elsewhere and to the burden of servicing that debt through cuts in government spending and rising interest costs – more guns, less butter; more arms, less fuel; more weapons, less food.
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