What happens to inflation if the war in Iran ends?

Traffic through the Strait of Hormuz is starting to recover after months of disruption, with S&P Global Market Intelligence reporting that 20 vessels passed through the strait on June 22 alone.

In the meantime, crude oil prices have fallen below $80 per barrel, WTI is now under $75, while GasBuddy reports that the national average gasoline price has dropped by 14.1 cents per gallon over the past week to $3.85.

Lower energy prices should mean lower inflation, right?

If so, expectations for Federal Reserve tightening should also fade, although according to the CME FedWatch Tool, not only is a rate cut by year-end effectively priced out, but markets are also not ruling out two or even three additional hikes, bringing the federal funds rate to 4.50–4.75%.

Why?

For the same reason, the European Central Bank no longer expects inflation to return to its 2% target before 2028, as wage pressures and higher costs continue to feed through the economy, while pass-through costs — the process by which producers and suppliers pass rising expenses on to consumers due to inflation or other factors — typically take several months to fully show up in retail prices.

Regarding the US specifically, besides the fact that consumer prices rose 4.2% in May compared with a year earlier and increased 0.5% from the previous month, meaning inflation remains well above the 2% target, the Federal Reserve raised its inflation forecast for 2026 from 2.7% to 3.6%, increased its core inflation forecast from 2.7% to 3.3%, and lifted its 2027 projection from 2.2% to 2.5%.

That said, there is little reason to expect monetary policy easing anytime soon, even if the Strait of Hormuz were to reopen fully.

It is also worth considering that oil prices could find support from pent-up demand. For nearly four months, many countries largely avoided buying oil at elevated prices, instead relying on strategic reserves. Now, not only do they need to replenish those reserves, but they may also choose to increase them as a precaution against future disruptions to energy supply chains.