A driver refuels a vehicle at a Wawa gas station in Media, Pennsylvania, USA, on Monday, March 2, 2026.
Matthew Hatcher | Bloomberg | Getty Images
With oil prices rising to $100 a barrel and the labor market virtually paralyzed, the U.S. economy and financial markets are once again at risk of stagflation.
High inflation and slow growth represent a dual threat, as stimulative measures such as interest rate cuts and government spending only increase inflation. Persistently higher prices, in turn, could dampen the labor market and consumer spending, which make up more than two-thirds of the US economic engine.
“I have long been concerned about the risk of stagflation, in part because the economy faces such different inflationary pressures,” said Erik Norland, chief economist at CME Group. “You have huge budget deficits, above-target inflation, and central banks are easing policy anyway. And then you add $100 a barrel of oil.”
Markets were once again unsettled on Monday by the prospect of continued fighting in the Middle East. Earlier in the session, U.S. crude oil prices rose above $100 a barrel for the first time since 2022, although prices eased toward the afternoon.
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Crude oil prices
The increase in energy costs came just days after the Bureau of Labor Statistics reported that the economy lost 92,000 jobs in February and the unemployment rate rose slightly to 4.4%. The weak employment numbers followed a pattern of stagnant job growth that began in early 2025, raising fresh fears that a strong growth spurt had been deflated for most of last year. Total job growth for all of 2025 – 116,000 – was 5,000 less than the previous year’s monthly average.
At the same time, core inflation, as measured by the Federal Reserve’s preferred indicator, was most recently at 3%, a full percentage point above the central bank’s target.
Flashback to stagflation
The economy last experienced an oil-related bout of stagflation in 2022 after Russia invaded Ukraine, but even then it wasn’t as bad as in the 1970s. Similar fears intensified when the Trump administration imposed aggressive tariffs in April 2025.
There have certainly been several threats of stagflation over the years, most of which disappeared as the economy stabilized.
For most economists and Wall Street strategists, duration is the most important factor this time. If the Iran situation can be resolved in a few weeks, as President Donald Trump has promised, any stagflationary shock will likely be muted. Oil futures point to lower prices later in the year, but that may be an unreliable indication of which direction prices will ultimately move.
“Higher oil prices, higher inflation, that creates a shock,” said Jim Caron, chief investment officer of portfolio solutions at Morgan Stanley Investment Management. “But if oil prices go up long enough, it becomes a growth scare and bond yields start to fall. If bond yields go down because people are worried about growth, then you’re in stagflation mode.”
Bond yields have mostly risen during the Iran crisis, suggesting investors are pricing in inflation fears from the rise in oil prices.
Similarly, markets are scaling back expectations of interest rate cuts from the Federal Reserve, betting that the central bank will focus more on defending its 2% inflation target than on stimulating a labor market that is experiencing both low hiring and low firing rates.
“The U.S. economy and stock market are currently stuck between Iran and a difficult environment. The same goes for the Fed,” wrote market veteran Ed Yardeni, founder of Yardeni Research. “If the oil shock continues, the Fed’s dual mandate would be stuck between the increasing risk of higher inflation and rising unemployment.”
Yardeni said he raised the odds of 1970s-style stagflation to 35%, saying the Iran war was “the latest stress test of the U.S. economy’s resilience since the start of the decade.”
Most economists consider the pass-through costs of rising oil prices to the rest of the economy to be minimal. However, Yardeni noted that rising fuel prices threaten to exacerbate food inflation as oil is used to make fertilizer.
The Fed’s reaction
For their part, Fed officials tend to ignore such fluctuations when formulating policy. But prolonged pressure can influence policy.
Ahead of the US-Israeli attack on Iran, futures traders priced in the Fed’s next interest rate cut in June, with at least one more before the end of the year. This first cut has now been postponed until September – July at the earliest – and there will be no second cut in 2026. The implicit key interest rate at the end of the year is now 3.21% from the current 3.64%.
“This is likely the worst-case scenario for monetary policy, and we will likely hear the term stagflation coupled with an ‘Iran crisis’ again,” wrote Eugenio Aleman, chief economist at Raymond James. “We do not believe that this new scenario will cause Fed officials to change their minds on monetary policy for now and that they will wait until they receive more data on the risks to their dual mandate between inflation and employment.”
In fact, other economic signals outside of the labor market are quite strong.
The Atlanta Fed expects GDP growth of 2.1% for the second quarter – a significant decline from the previous three quarters, but still quite strong. Reports last week suggested that both manufacturing and services sectors expanded in February, although retail sales fell 0.2% in January.
“While $100 a barrel of oil is worrisome for stocks, inflation, stock market and earnings conditions are all better now than they were in March 2022, when oil prices last exceeded $100 following Russia’s invasion of Ukraine,” Carol Schleif, chief market strategist at BMO Private Wealth, said in a note. “The key here is the duration of the price rise and the conflict itself. The shorter the duration, the more likely the effects would be temporary and the economy more resilient.”
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