Inflation risk re-surging as tensions heat up between Israel and Iran

Investors and central banks around the world will be closely watching the Middle East to see whether the latest Israeli attack on Iran, in the early hours of Friday (today), will lead to further retaliation and stoke more concerns about the stability of oil supply from the world’s seventh-largest producer.

United States officials confirmed that Israel had on Friday conducted a military operation in Isfahan, Iran – a city home to some of Iran’s nuclear capabilities, although the International Atomic Energy Agency confirmed there was no damage to any nuclear sites.

The news sent oil and gold prices upwards, with Brent crude rising by 1.8 per cent to reach $88 a barrel, while gold – typically seen as a hedge against inflation – came close to a record high before settling at just under $2,400 an ounce.

The energy price shock that occurred after Russia invaded neighbouring Ukraine in 2022 had far-reaching ramifications, throwing Europe and the US into an inflationary period that has only calmed down in recent months.

Another concern is the impact of any potential conflict on shipping passing through the Strait of Homruz between Oman and Iran, a crucial shipping route which sees about 20 per cent of the world’s total oil supply pass through.

Saudi Arabia, the United Arab Emirates, Kuwait and Iraq, as well as Iran, all send most of their oil exports through the strait.

To battle high inflation, the European Central Bank, the Bank of England and the Federal Reserve all instituted a policy of high interest rates that have yet to be cut.

Last week, the ECB confirmed that its record-high rate will remain in place for the next months.

The latest Israeli attack comes after Iran sent its own drone swarm last weekend, in what was the first direct attack from Iranian territory towards Israel in decades.

Iran was itself responding to an attack on its Syrian consulate on 1st April, when an Israeli airstrike killed one of its top generals.

The enmity between the two countries – both of which are presumed to have some nuclear capability – has been simmering for years, with Israel carrying out several assassinations of Iranian generals and scientists while Iran funds and arms militia groups like Lebanon’s Hezbollah and Gaza’s Hamas.