From Risk to Reality: Iran, Inflation, and Economic Resilience

By Adam Thurgood on August 26, 2026

They say time flies when you’re having fun.  Apparently, it also flies while you’re watching prices climb at the pump.  I find it hard to believe that we’re already six months into the war with Iran.  When I first wrote about the conflict in early March, oil markets were headed higher and the world was trying to assess whether the disruption to energy flows would prove short-lived.  Two ceasefires and several promised “deals” later, the Strait of Hormuz remains essentially closed, fuel markets remain tight, and the economic consequences of rising energy prices are becoming harder to ignore.

Energy Flows Constrained

Let’s start with a quick look at ship crossings through the Strait of Hormuz, or better stated, the lack thereof.  Other than a few weeks during June and July, ship crossings through the most important energy transportation route on the planet have been a tiny fraction of their normal, pre-war level.  This has created a disjointed global energy market, characterized by falling inventory levels and massive friction within the refining industry.

Why Refining Matters

Refiners are built to handle specific types of crude oil.  Not only do we have the logistical constraints from the war making it difficult to get the right oil to the right place, but we also have Ukraine targeting Russian refineries with advanced attack drones.  The end result is a lack of refining activity and insufficient supplies of gasoline and diesel to keep prices in check. 

Gasoline prices and oil prices tend to trade fairly tightly but have opened up a noticeable gap in recent weeks as refining has become more strained.  This is pressuring consumers’ pocketbooks.

Diesel and the Inflation Risk

While the pain at the pump is largely viewed from the lens of the consumer, businesses are also feeling the pain.  Diesel tends to affect what businesses pay to produce and move goods and, unfortunately, diesel prices have surged.  The gap between the price of diesel and crude oil is substantial, as diesel is trading as if the price of oil was $140. 

Elevated diesel prices will eventually become a problem because higher production and transportation costs will find their way into consumer inflation.  This is happening at a time when core inflation remains above a level consistent with the Fed’s target (red line) and has averaged over 4% over the past five years (gray line).  If goods inflation begins to accelerate due to diesel prices, the Fed will have a real problem on its hands.

The Political Consequences

Higher inflation and the conflict with Iran are also adding to the political pressure facing President Trump and Republicans. President Trump’s approval rating has fallen below 40%, a rare depth for a national polling average.

Republicans’ odds of maintaining control of the Senate have also taken a hit, with Polymarket now assigning a 50/50 chance that Democrats win it back. With the odds of Democratic control of the House approaching 90%, prediction markets are signaling growing political vulnerability for President Trump and Republicans.  This matters because losing control of Congress would constrain much of Trump’s domestic agenda. With the midterms approaching, the administration has a strong incentive to seek a quick resolution that restores energy flows and relieves pressure on gasoline and diesel prices.

Economic Resilience

The political consequences of the war are becoming clear, but the economic impact is more nuanced.  Measures of economic activity from corporate earnings to new orders have surged.  Additionally, manufacturing and service PMIs, which measure business conditions through surveys, are clearly showing a strong aggregate economy (above 50).  We are nowhere near recessionary levels (red bars).

The unemployment rate, while a lagging indicator, is also moving lower.  More importantly, it has broken below the 24-month moving average, which has historically signaled a coming period of improving labor conditions. 

Finally, credit spreads, which measure how much investment-grade corporations must pay in interest above Treasury yields, remain tight.  While spreads have risen a touch, we are still much closer to the lows than periods of stress.

Portfolio Implications

The economy has absorbed the disruption better than most feared. However, resilience should not be confused with immunity. The longer energy flows remain impaired, the greater the risk that today’s tight fuel markets lead to a broader inflation problem.  The knock-on effects of higher inflation could result in a concerning cycle where the Fed raises rates, consumers tighten their belts and spend less, corporate profit margins contract, credit conditions tighten, and unemployment begins to rise. 

Given the economy’s resilience, we continue to maintain exposure to themes that have a strong fundamental story, such as AI infrastructure, real assets, and international markets while being cognizant of the risks lurking in the shadows.  Energy remains a natural portfolio hedge against the inflationary risks created by the Iran conflict. 

We remain overweight energy and continue to view it as an important part of an investment portfolio, especially in an environment where today’s risks threaten to become tomorrow’s reality.