Stagflation Fears Mount as Iran War Drives Up Energy Prices

Stagflation, the combination of elevated inflation and slowing growth, has become a growing concern for investors and central banks as the war in the Middle East drives energy prices higher.

Bank of America's March Global Fund Manager Survey showed stagflation becoming investors' dominant expectation, cited by 51% of respondents, up from 42% a month earlier. Meanwhile, the euro zone flash PMI survey for March showed growth nearly stalling as the Middle East war fuelled an inflation surge. The war in the Middle East is driving energy prices sharply higher while weighing on growth.

UK RATES ON HOLD

In the United Kingdom, the Bank of England's Monetary Policy Committee voted unanimously on March 19 to hold Bank Rate. The central bank has maintained rates at 3.75% amid Middle East war-driven inflation shocks, reversing earlier expectations for rate cuts in 2026. The Bank expects the energy shock to keep UK inflation above 3% this year and said it stood “ready to act as necessary”.

UK ACTIVITY SLOWS

The UK flash PMI for March, published on March 24, showed manufacturers facing the sharpest one-month rise in costs since 1992, while the composite index slowed to 51 from 53.7 in February.

THE CENTRAL BANK DILEMMA

The European Central Bank left interest rates unchanged on March 19 and raised its 2026 inflation outlook because of the Iran war. Bank of England Governor Andrew Bailey said: “The best way to tackle this is at the source by reopening energy supply lines. We have held interest rates at 3.75% as we assess how events unfold.”