Scenario analysis quantifies Iran War's impact on U.S. inflation
A new working paper from the Federal Reserve Bank of Dallas quantifies the inflationary impact of the 2026 Iran War on U.S. headline and core PCE inflation. The study uses a DSGE model to project oil prices under various scenarios, then incorporates these projections into a VAR model to assess effects on inflation and expectations.
Modeling the oil price shock
The paper outlines a methodology to assess the inflationary impact of oil price surges, such as those caused by the hypothetical 2026 Iran War.
Researchers first generate quarterly oil price projections using a calibrated DSGE model of the global economy, considering various scenarios for the duration of oil supply disruptions.
These projections are then integrated into a monthly VAR model, which analyzes the impact of U.S. gasoline price shocks on inflation and inflation expectations.
The baseline scenario assumes a complete closure of the Strait of Hormuz, removing nearly 20 percent of global oil supplies.
This scenario projects average WTI prices reaching $110 per barrel for a one-quarter closure, $132 for two quarters, and $167 for three quarters.
Quantifying the price surge
The model predicts significant increases in Q4/Q4 headline PCE inflation for 2026: 0.35 percentage points for a one-quarter closure, 0.79 for two quarters, and 1.47 for three quarters.
Core PCE inflation would also rise, by 0.18, 0.31, and 0.49 percentage points respectively, suggesting potentially sizable effects.
Household inflation expectations, however, show only modest shifts, with 1-year expectations rising to 0.61 percentage points only if the closure lasts three quarters.
The analysis uses U.S. data available at the end of March 2026, reflecting real-time data constraints.
A blueprint for future crises
This study provides a robust framework for assessing the inflationary impact of geopolitical oil supply disruptions, moving beyond simplistic rules of thumb.
Its scenario-based approach offers critical, real-time insights for policymakers navigating highly uncertain global events.
This methodology is particularly valuable given the recurrent nature of such crises since the 1970s.