Top economist Mohamed El-Erian warns of stagflation gripping the entire world economy the longer the Iran war goes on

The global economy has withstood plenty of turmoil in the past few years, staving off a widely predicted recession in 2022, but the most recent conflict to break out in the Middle East could be one step too far for a world that was already starting to show some economic cracks.

Renewed conflict in Iran has already rattled global markets since U.S. and Israeli attacks began on Saturday. On Tuesday, the S&P 500 fell more than 1.5%. International investors weren’t spared either, with indexes falling sharply in London, Hong Kong and Tokyo, to name a few.

Market mayhem could just be the start of it if the war drags on and spreads further into the Middle East. A protracted and messy conflict with multiple belligerents could push energy prices upwards around the world, raising inflation and grinding growth to a halt, a toxic economic cocktail known as stagflation.

“A lot will depend on the duration and the spread of the conflict,” Mohamed El-Erian, a leading macroeconomic commentator and chief economic advisor at Allianz, told CNBC Monday. “The more it spreads, the more stagflationary it is for the global economy.”

The conflict in Iran is expected to lead to significant instability in energy markets, particularly oil and natural gas. Iran is a large producer and exporter of both, but the primary risk stems from the war disrupting tanker transit through the Strait of Hormuz, a narrow waterway connecting global markets with oil and gas fields in the Persian Gulf. A prolonged closure of the strait—whether by Iranian enforcement or indirectly as merchant ships choose to avoid a region blanketed by missile launches—would affect up to one fifth of globally traded oil and gas supply.

Former White House energy advisor Bob McNally said this week that an extended closure of the strait would lead to a “guaranteed global recession,” as countries scramble to secure other energy sources and instant supply cuts raise prices.

Oil and gas prices both surged in the aftermath of the attack, and maritime insurers canceled coverage for ships transiting through the strait as missiles rained as far as the international tax havens of Dubai and Abu Dhabi. 

El-Erian argued the ultimate impact will hinge on the duration and geographic spread of the conflict. A short, contained flare-up would mean a sharp but temporary hit to energy prices and headline inflation, he suggested, but an extended and widening conflict would both “fuel inflation, disrupt supply chains, and undermine growth.” 

For the U.S. economy, instability in the Middle East could hardly have come at a worse time. El-Erian noted that stagflation risk is higher because of “limited” policy flexibility from the Federal Reserve. During an energy shock, the Fed might conceivably lower short-term interest rates to mitigate inflationary pressures. But some of the central bank’s governors expressed caution about significant rate cuts this year, noting how inflation has remained above the Fed’s preferred 2% target for five consecutive years. The latest readings in January showed inflation is currently at 2.4%.

El-Erian wasn’t the only commentator to note that the U.S. entered this conflict with an increasingly constrained Federal Reserve. Speaking at an S&P Global conference Monday, former Treasury Secretary Janet Yellen remarked that persistent inflation made a policy of aggressive rate cuts unlikely, regardless of what might happen in the Middle East.

“I think the recent Iran situation puts the Fed even more on hold, more reluctant to cut rates than they were before this happened,” she said.

But even before the conflict in Iran broke out, concern was bubbling about the U.S. economy’s immediate outlook. GDP growth slowed sharply at the end of last year, and recent data from the Labor Department showed that employers only added 181,000 jobs in 2025, the labor market’s weakest year since the pandemic. 

Writing in a LinkedIn post Sunday, El-Erian called the strikes against Iran “yet another shock to a global economy that has so far proven extremely resilient.” In remarks on Monday, President Donald Trump said the U.S. campaign in Iran could proceed for four or five more weeks, but could “go far longer than that” if necessary. The question is whether the world can take that long of a shock without crumpling beneath the weight of rising inflation and staggering growth.

“The cumulative effect of these disruptions is a fresh potential bout of stagflation blowing through the global economy,” El-Erian wrote.

This story was originally featured on Fortune.com