Stagflation Fears Return as Oil Prices Reclaim $100

Brent crude climbed nearly 40% in July, marking its largest monthly gain since March. The rally intensified after Houthi forces claimed strikes on two Saudi oil tankers in the Red Sea, effectively widening the scope of shipping disruptions beyond the Strait of Hormuz. European natural gas futures have mirrored this trend, recording their sharpest monthly increase in months, while government bond yields from the U.S. to Japan and Germany continue to hit multi-year highs.

Alessia Berardi, head of global macroeconomics at Amundi Investment Institute, warns that the conflict significantly elevates the risk of stagflation. The economic strain is compounded by new U.S. tariffs of up to 12.5% on goods from 60 trading partners, including China and the European Union. These pressures are forcing traders to bet on further interest rate hikes, even as policymakers struggle to balance inflation control with the risk of stifling economic growth.

Europe remains particularly exposed to this volatility. Morgan Stanley’s Andrew Sheets notes that the European Central Bank appears more aggressive in hiking rates into oil-driven inflation than the Federal Reserve, potentially creating a double-hit scenario for the region. Meanwhile, the World Bank suggests that the ongoing instability could drag global growth down to 1.3%, a stark decline from the 2.9% recorded last year. While energy-exporting nations hold a relative buffer, even the U.S. faces mounting costs, with fuel prices at the pump exceeding $4 a gallon and home loan interest rates climbing to their highest levels in a year.