From GDP to inflation: How US-Iran conflict is affecting major economies

The US-Iran conflict has emerged as an economic shock extending well beyond West Asia, disrupting energy supplies and shipping routes, pushing up oil and gas prices and raising inflation risks across major economies.

The Strait of Hormuz, through which about one-fifth of global oil normally passes, has been severely disrupted. The immediate economic effect has been a sharp rise in global energy prices. Brent crude moved back above $100 a barrel in September, with S&P Global estimating that the average Brent price in the first half of September was more than 40 per cent above its early-July low. The war driven impact has reverberated across major economies, but its effects have not been uniform.

Growth takes a hit, but the impact varies

Higher energy costs are beginning to weigh on the global growth outlook, although the extent of the impact differs across economies. Energy importers face a more direct hit as higher fuel costs raise production and transport expenses.

The International Monetary Fund’s (IMF) July 2026 World Economic Outlook projected global growth at 3 per cent in 2026, down from the 3.5 per cent average recorded in 2024 and 2025. The IMF said the war shock was weighing on energy importers and vulnerable economies, although stronger technology-related investment was offsetting some of the drag.

Recent growth data also show significant differences across major economies. The US economy grew 2.1 per cent year-on-year in the second quarter of 2026, while China’s gross domestic product (GDP) expanded 4.3 per cent. Japan grew 0.5 per cent, Germany 0.4 per cent and the UK 1.2 per cent over the same period, according to OECD data. India recorded 7.8 per cent year-on-year real GDP growth in Q1 of FY 2026-27, according to the Ministry of Statistics and Programme Implementation.

These figures cannot be attributed entirely to the Iran conflict. They reflect each economy’s broader domestic and external conditions. However, a prolonged disruption to energy supplies could add to the growth impact, particularly in economies that rely heavily on imported oil and gas.

Trade flows come under pressure

Higher crude prices and shipping costs are also putting pressure on import bills and trade balances. According to official data, India’s trade deficit widened to $26.86 billion in August, with crude import costs rising 25.8 per cent. Japan recorded a 1.1 trillion yen trade deficit in August, driven in part by a 58.7 per cent increase in petroleum imports. Germany and the UK also face pressure from higher shipping costs and their reliance on imported fuel, adding to vulnerabilities across trade and industrial activity.

China has sought to manage disruptions to its energy trade by initially restricting and subsequently redirecting refined-fuel exports. The US is differently positioned because it is a major domestic oil and gas producer and exporter, giving it greater protection on the supply side; however, its consumers remain exposed to global energy prices.

Currencies face pressure

The energy shock is also feeding into currency markets. Oil-importing currencies such as the Indian rupee and Japanese yen have come under pressure, while the US dollar has remained relatively firm. The Chinese yuan has shown greater resilience, supported in part by China’s relatively lower exposure to imported energy than some other major economies. The euro and British pound, meanwhile, have faced pressure as higher energy costs add to inflation concerns.

Inflation concerns deepen

The rise in energy prices is feeding into inflation across economies, with the impact extending beyond fuel to transport, manufacturing, food and other goods.

In the US, consumer inflation was 3.4 per cent in August, unchanged from July, while the energy index rose 16.3 per cent year-on-year. India’s retail inflation accelerated to 4.82 per cent from 4.45 per cent in July, with food inflation at 5.95 per cent. Inflationary pressures were also visible across Europe. UK inflation rose to 3.1 per cent from 2.9 per cent in July, with motor fuels among the biggest contributors to the monthly increase. Germany’s inflation rate rose to 2.9 per cent, while energy prices increased 10.5 per cent year-on-year. In Japan, headline inflation stood at 1.9 per cent in August. China remained an outlier, with consumer inflation at 0.8 per cent, even as factory-gate and producer price pressures picked up

Oil is the common shock, but exposure differs

One of the most prominent shocks from the war has been the rise in energy prices. Economies that rely heavily on imported oil and gas face a more direct hit, while producers and countries with diversified energy supplies have greater buffers.

India has faced a direct impact through its crude import bill. The country’s crude-oil import bill rose 48.4 per cent year-on-year to $74.8 billion during April-August, even as import volumes remained nearly unchanged, according to Petroleum Planning and Analysis Cell data. India spent $24.4 billion more on crude in the first five months of FY27 than a year earlier.

Japan also remains vulnerable because of its heavy dependence on imported energy, while Germany and the UK face higher energy and transport costs. China is also exposed, with more than a third of its crude supply normally transiting the Strait of Hormuz. However, strategic reserves and diversified suppliers provide some buffer against supply disruptions.

The US is relatively better insulated on the supply side because it is a major oil and gas producer. But domestic consumers are not shielded from the global shock: US petrol prices remain linked to international crude markets. The national average price of regular gasoline was about $4.47-$4.48 a gallon on September 21.

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