Middle East conflict may reverse early-2026 disinflation

Global inflation dynamics are shifting as recent CPI data, central bank decisions and energy market developments reshape the outlook across major economies. Disruptions linked to the Middle East conflict are adding new pressures, particularly through higher oil and LNG prices. Read the insight to find out more about:

• CPI and central bank trends: The UK, Eurozone and US show differing inflation paths, with the BoE and ECB maintaining rates amid slowing but uneven disinflation. 
• Energy market disruptions: The conflict in the Middle East is affecting key oil and LNG supply routes, increasing the risk of renewed global inflation. 
• Market reactions: Currency moves, PMI readings and bond market shifts reflect rising energy prices, a stronger US dollar, and evolving expectations for policy easing.

Inflation has remained a key economic theme over the past four years, driven by supply chain disruptions and energy shocks. A central measure of this trend is the Consumer Price Index (CPI), which tracks changes in the prices of a representative basket of goods and services – including food, housing, transport, and energy. It remains one of the clearest indicators of how the cost of living evolves. 

Recent CPI releases across major Western economies point to a broad slowdown, with several countries reporting softer-than-expected readings. Both the European Central Bank (ECB) and the Bank of England (BoE) have maintained current interest rates. However, the economic backdrop differs across the two regions. 

In the UK, inflation remains relatively persistent, with CPI rising 3.4% year-on-year as of December 2025. The BoE revised its 2026 growth outlook from the 1.2% to 0.9%, while the unemployment forecast has been adjusted upward from 5% to 5.3%. Global uncertainty and macroeconomic volatility are likely to continue weighing on economic activity throughout 2026.    

After peaking at 11.1% in October 2022, CPI fell to the BoE’s 2% target in May 2024, reaching a low of 1.7% in November 2024. Inflation picked up again in 2025 due to higher energy and food prices, as well as strong consumer spending. A more meaningful decline only began in Q3 2025, leading the BoE to expect a return to its 2% target in Q2 2026. Labour market conditions remain a key variable, as a rise in unemployment could help ease underlying inflation pressures.

Eurozone GDP growth is expected to weaken marginally in 2026, with forecasts pointing to a 1.2% expansion, down from 1.5% the previous year. The ECB’s policy decisions will remain highly dependent on Germany’s performance. If German momentum fails to recover and disinflation persists, rate cuts may become more likely - although this is not currently the baseline scenario. Germany recently lowered its 2026 GDP projection to 1.0% from 1.3% in January. 

Sentiment indicators, including the Purchasing Managers’ Index (PMI), remain above the 50 threshold, and labour markets are broadly stable. Eurozone inflation declined to 1.7% in January. While core inflation fell to 2.2%, the lowest level since late 2021. The EU unemployment rate stood at 5.9% in December 2025. 

However, the conflict in the Middle East has significantly altered the inflation outlook. Disruption to oil supply routes have led to sharp increases in energy prices, rising the risk of renewed inflation globally. 

In 2025, around 13 million barrels of oil passed through the Strait of Hormuz daily, representing roughly 31% of all seaborne crude flows. About 20% of global liquefied natural gas (LNG) shipments from the Persian Gulf are also at risk. East Asian economies are particularly exposed, with the region supplying 75% of Japan’s oil imports and 70% of Korea’s. A sustained disruption would raise energy import costs and pressure current-account balances. 

China’s LNG inventories stood at 7.6 million tons at the end of February, providing short-term support. Several European countries – including Italy, Greece, Spain, Poland and Belgium – also rely on flows through the Strait. While Europe is not expected to face outright shortages, continued price increases and market disruption appear likely. 

The challenges extend to global gas markets. Qatar and the UAE supply 99% of Pakistan’s LNG imports, 72% of Bangladesh’s, and 53% of India’s. Limited storage capacity in Pakistan and Bangladesh increases vulnerability. Economies heavily reliant on energy imports face heightened risks of imported inflation. Conversely, major exporters such as the US, Canada, Russia and Norway may benefit from higher prices. 

In summary, higher oil and gas prices could trigger a renewed wave of inflation. The US Dollar is expected to remain firm, while gold – already strong in 2025 - may continue to benefit from safe-haven demand. Some analysts suggest prices could approach USD 6,000 in 2026. 

In addition to energy-driven inflation, a potential 15% US global tariff could introduce further upward pressure on prices, following recent developments in US trade policy.