Economists warn that war with Iran is driving up energy prices, and the Fed may be forced to hike interest rates against the economic tide.

Summary: Economist Peter Schiff warns that the war with Iran is triggering a sharp surge in energy prices, pushing the annualized U.S. import price inflation rate in February close to 19%, significantly intensifying inflationary pressures. Although the core PCE index—preferred by the Fed—shows inflation already exceeds the Fed’s 2% target, both market signals and data suggest that rate hikes cannot resolve geopolitical disruptions to oil supply; instead, they would harm the economy, making an actual Fed rate hike highly unlikely. Nevertheless, elevated interest rates may persist, exposing the U.S. economy to risks of sticky inflation and stagflation. I. Peter Schiff warns that the annualized inflation rate for U.S. import prices in February has reached 19%; unless the Fed hikes rates immediately, inflation will surge sharply. Recently, U.S. economist Peter Schiff issued a stark warning: if the conflict with Iran does not end swiftly, the sharp rise in U.S. import and export prices—compounded by a massive global oil shock—will precipitate a severe financial collapse, forcing the Fed to hike rates against prevailing economic headwinds. Following the U.S. Department of Commerce’s release of sharply rising February import and export price data, economist Schiff issued a stern warning to both markets and the Fed. On March 25, Schiff posted on X (formerly Twitter), criticizing U.S. President Donald Trump for downplaying the war with Iran and the resulting oil price surge as a “little trip,” suggesting energy costs would quickly rebound once hostilities subside. Yet worsening economic conditions leave little room for such optimism. Schiff declared the U.S. is “heading toward a full-blown financial crisis” and described the latest inflation indicators as harbingers of economic disaster. He stressed the situation is dire: “Import prices surged 1.3% month-on-month in February, while export prices jumped 1.5%.” He calculated these monthly increases imply an annualized inflation rate of 16.8% to 19.6%. Schiff warned that unless the Fed hikes rates by several hundred basis points immediately, inflation will spike dramatically. II. The Fed’s preferred inflation gauge—the core Personal Consumption Expenditures (PCE) index—is even higher than its latest official data suggests. On March 25, Benzinga reported that Gerard MacDonnell, an economist at the relatively cautious Wall Street inflation-tracking firm 22V Research, told clients in a report that U.S. inflation may have already breached 3.25% weeks before official confirmation. This indicates the Fed’s preferred inflation metric now exceeds its longstanding appropriate target of 2% by more than one percentage point. MacDonnell stated, “Calling it stable—or even sticky—is unrealistic.” He released a simulated report showing the annualized core PCE inflation rate for March stood at 3.27%—125 basis points above the Fed’s 2% target and 54 basis points higher than a year earlier. Core PCE—not the more widely known Consumer Price Index (CPI)—is the metric the Fed uses to guide interest-rate decisions. It is based on a broader basket of goods and services, with housing weights differing from those in the CPI—explaining why the two indices can diverge significantly at key inflection points in inflation cycles. Core PCE is designed to exclude food and energy prices.

Fed Governor Goolsbee: Returning to the 2% inflation target 'won’t be painless'—jobs, wages, or both may bear the cost.

Goolsbee’s remarks stand in clear tension with those of newly appointed Fed Chair Waller, who stated at his post-meeting press conference that achieving the inflation target need not come at the expense of the labor market. Supply shocks are no longer just 'one-off events' In a prepared speech delivered at an event in London, Goolsbee observed that supply shocks in recent years have “arrived more frequently, hit harder, and lasted longer.” If inflation triggered by supply shocks begins to prove persistent, the Fed’s traditional logic of ‘looking through’ such shocks no longer holds. In the past, central banks typically treated supply-chain disruptions and energy-price spikes as temporary factors—and avoided hiking rates further to suppress demand. But Goolsbee argues that such shocks are increasingly becoming a “structural feature” of the economy, often lasting far longer than initially anticipated. He cited three sources of pressure: supply-chain dislocations, persistently high oil prices this year, and escalating tariff tensions. In his view, if recurrent supply shocks ultimately evolve into sustained inflation, the Fed must still act—otherwise it risks failing its statutory mandate of price stability. Taming inflation may exact a toll on employment and wages Goolsbee contends that even when inflation stems from supply shocks—not overheated demand—the Fed must still tighten policy to dampen demand and narrow the gap between supply and demand, thereby restoring price stability. However, he emphasized such rate hikes need not be as aggressive as those deployed against demand-driven overheating, since the current problem is not simply excessive demand. Still, so long as supply shocks persist, policy cannot be ‘painless’: restoring macroeconomic balance may entail job losses, wage declines, and slower growth. Goolsbee termed this dilemma the “painful trade-off between employment and inflation” brought about by stagflationary shocks. Under deteriorating supply conditions, central banks face near-impossible choices—unable to fully avoid either inflation or damage to economic activity.

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