Entering the danger zone of stagflation: When will high oil prices shift the risk from inflation to recession?

As Iran refuses to accept a ceasefire agreement and news of Trump’s intention to deploy ground troops continues to ferment, Brent crude prices surged by 3% to $115 per barrel in early Asian trading on Monday, putting pressure on risk assets. On March 28, the Houthis officially intervened in the Middle Eastern conflict, threatening Saudi Arabia’s 5 million barrels per day of crude oil exports that are routed from the Strait of Hormuz through the Red Sea and the Mandeb Strait via the Port of Yanbu. If both major global energy trade routes are exposed to risks simultaneously, it could lead to an increase in oil prices by $20 per barrel.

Currently, shipping in the Strait of Hormuz remains stagnant, and with the increasing range of attacks on energy facilities in the Persian Gulf, global crude oil supply continues to be obstructed, and the outlook remains uncertain. Amid concerns about the prolonged nature of the conflict, the baseline scenario for energy prices has been significantly raised, and international oil prices are facing considerable upward pressure, with Brent crude moving towards the $120 per barrel range.

The impact of high oil prices is first reflected in inflationary shocks, forcing central banks to adopt a hawkish stance. However, as oil prices rise further, the negative impact on the economy will exhibit nonlinear amplification: residents’ real income will be eroded, consumption will be squeezed out, corporate costs will rise and compress profits, financial conditions will tighten, and asset prices will decline, significantly weakening growth momentum. Once oil prices breach a certain threshold, macro risks will shift towards concerns about demand destruction and recession.

The Risk Intersection of Inflation and Stagnation

When Brent crude prices remain in the range of $100-$110 per barrel, the macroeconomic performance is characterized by typical supply-driven inflationary impulses. During this phase, the rise in oil prices primarily manifests as an overall increase in inflation, with relatively limited impact on growth. Companies can still absorb some costs through profit compression or inventory adjustments, and consumer spending has not yet contracted significantly. The central bank’s reaction function will be highly pronounced; to prevent inflation expectations from drifting upward, central bank policies will be forced to adopt a hawkish stance. Yields will rise, and financial conditions will tighten. For investors, during this phase, the correlation between stocks and bonds turns positive, and traditional diversified investment portfolios briefly lose their protective barriers.