The global economy appears surprisingly resilient in the face of the Iran war, but this stability may be more fragile than it seems, according to Bank of England policymaker Megan Greene.
Ms. Greene recently suggested that our current economic stability is largely thanks to companies and governments using up their inventories. This is a crucial point because it reframes the situation: what looks like resilience is actually a temporary buffer. This buffer softens the initial economic blow from the war but creates a bigger problem for later. As these stockpiles run out, the risk of inflation rises, making it harder for central banks to manage the economy.
This view is strongly supported by recent events. First, the International Energy Agency (IEA) reported in May that global oil inventories were drawn down at a record pace in March and April. This is direct evidence that the world is using its reserves to cushion the shock of disrupted oil supplies from the Strait of Hormuz. The depletion is so fast that some call it a record-speed draining of the world's 'oil buffer'.
Second, the effects are already showing up in prices. U.S. inflation accelerated in April, driven largely by rising energy costs. This shows that the inventory cushion isn't perfect and that price pressures are building. The longer the supply disruptions last, the more likely it is that these higher energy costs will seep into the prices of other goods and services.
This explains why policymakers like Greene are cautious. Despite some signs of economic weakness, they are hesitant to lower interest rates because the underlying inflation risk is growing. They are in a 'wait and see' mode, watching how the conflict and inventory levels evolve. The current stability is a borrowed one, and the bill—in the form of higher, more persistent inflation—may soon come due.
- Stagflation: A period of slow economic growth and high unemployment (stagnation) combined with rising prices (inflation).
- Force Majeure: A clause in contracts that frees parties from liability if an extraordinary event or circumstance beyond their control prevents them from fulfilling their obligations.
- IEA (International Energy Agency): A Paris-based autonomous intergovernmental organization established to help coordinate a collective response to major disruptions in the supply of oil.