The attack on Iran has driven up electricity and gasoline prices, risking new inflation and a weaker business cycle in Sweden. Lars Calmfors warns that politicians may be tempted by populist measures. The war resembles the 1970s oil shocks but with modern differences.
Economic assessors worldwide are analyzing how the Middle East war affects global oil and gas prices, inflation, and the business cycle. It could become a second serious supply disruption after the 2022–2023 energy and food price shock linked to the Ukraine war.
Parallels to the 1970s oil price shocks are clear: a first inflation shock in 1973–1975 after Arab states' oil embargo following the Yom Kippur War, followed by a peak around 1980 due to reduced production in Iran during the revolution and war with Iraq. As attributed to Mark Twain: history does not repeat itself, but it rhymes.
Differences from the 1970s include lower oil dependence, faster falling inflation thanks to consistent monetary policy, and no expected decline in productivity growth – on the contrary, AI could drive it upward.
The war risks a new inflation peak and worse economic development both globally and in Sweden, depending on how long the Strait of Hormuz remains closed to shipping and how Gulf states' oil and gas production is affected. Temporarily, inflation could rise by a couple of percentage points and GDP growth be lower than forecasted if the war drags on.
Central banks face the challenge of balancing inflation and economic support. In the US, with weak public support for the war and risks of higher living costs ahead of midterms, Republicans may want a quick end. Trump can flexibly declare victory, but may be bound to demands for unconditional surrender. Israel could prolong the conflict to weaken Iran, while Iranian leaders might see a drawn-out war as a way to increase global economic costs and deter future attacks. Iran could continue strikes via drones and missiles despite reduced military capacity.
For Sweden, a prolonged war threatens higher inflation and counters the anticipated business cycle upturn, which could justify expansive fiscal policy and a VAT cut on food. However, rising fuel and electricity prices may tempt tax cuts and subsidies, despite countering market signals of scarcity – a risk in a populist political climate.
The war illustrates increased uncertainty in economic forecasts due to unpredictable geopolitics, particularly from the US, with measures like tariffs, reduced Ukraine support, threats to annex Greenland, attacks on Venezuela, and two wars against Iran.
