Strait of Hormuz oil flows have plummeted to a trickle after US-Israeli strikes, sparking fears of sustained energy price shocks. Analysts warn prolonged conflict could reverse three years of inflation-fighting gains, with £1,900 average energy bills projected if gas prices remain elevated. Rate cuts expected in 2026 are now under scrutiny as markets reassess risks, though optimism about short-term hostilities persists.

Central banks face a tightrope walk. Energy prices surged 18% for gas, with CPI impacts estimated at 10-15 basis points. Bank of England officials signal reluctance to cut rates before March, citing labor market slack, while the European Central Bank maintains rate stability despite a 20% chance of 2024 hikes. Resilience from diversified energy supplies and oversupplied markets offers temporary relief, but inflation undershoot risks have shifted to overshoot concerns.

The Federal Reserve remains cautious, with analysts projecting a 0.13% GDP drag in 2026 from higher oil costs. ECB President Christine Lagarde's "good place" 2% target faces pressure as oil glut dynamics clash with geopolitical volatility. Markets currently price two rate cuts in 2026, but hawkish shifts could emerge if tensions persist.

This Iran war market impact underscores energy's outsized role in monetary policy. While oil capital expenditures may offset consumption losses, the ECB's breathing room and Fed's growth concerns highlight divergent paths. Trump's reelection calculus adds political urgency to de-escalation, though market pricing suggests a wait-and-see approach for now.