Asset Management: Monthly Macro Insights - May 2026
The conflict involving the United States, Israel and Iran has taken on a new economic dimension.
The disruption of traffic through the Strait of Hormuz has transformed a regional geopolitical event into a global economic shock, driving up energy and transport costs while adding pressure to supply chains worldwide. The resulting environment risks combining slower growth with persistent inflation, raising concerns over slowflation and, potentially, stagflation.
The Strait of Hormuz: an underappreciated binding constraint
Roughly one fifth of global oil consumption and a significant share of liquefied natural gas (LNG) exports normally transit the Strait of Hormuz, and physical supply constraints have become binding.
More broadly, higher shipping costs, elevated insurance premia, and logistical bottlenecks are disrupting global value chains. Delays in intermediate goods deliveries undermine just in time production models, reduce capacity utilization, and discourage investment. The result is a drag on global output that extends well beyond the energy sector.
From slowflation to stagflation risks
Taken together, these dynamics significantly increase the risk of slowflation—characterized by weak growth combined with inflation that remains above central bank targets.
In a more adverse scenario, supply disruptions would persist and second round effects could emerge through wages, pricing behaviour, and inflation expectations. Economies could then face stagflation, with rising unemployment alongside entrenched inflation—a combination that would severely constrain policy options and echo the most challenging episodes of past energy crises.
Diverging central bank responses
For central banks, the challenge is acute. They cannot repair supply chains or reopen shipping lanes. In principle, a negative energy shock can be looked through if it is temporary and inflation expectations remain anchored. That calculus changes, however, when the shock risks evolving into a lasting inflationary regime.
While both the Fed and the ECB face the same external shock, their policy responses reveal important contrasts rooted in economic structure and energy dependence.
The Fed faces a complex trade off between inflation control and employment stabilization inherent in its dual mandate. On the one hand, energy prices are rising, while tariffs are also contributing to inflationary pressures. On the other hand, the US benefits from a high degree of energy self sufficiency, which limits the direct pass through from higher oil prices to domestic activity. As a result, the Fed has adopted a wait and see stance.
By contrast, the ECB has emphasized vigilance. Europe’s recent experience with high inflation following the 2022 energy crisis may accelerate pass through and second round effects, making firms and workers quicker to adjust prices and wages. This “inflation memory,” combined with Europe’s high energy dependence and weaker growth backdrop, places the ECB’s focus squarely on inflation persistence rather than headline inflation alone.
The closure of the Strait of Hormuz has placed central banks in an exceptionally challenging position. While they can influence financial conditions, they cannot restore supply chains or resolve disruptions affecting global trade. As long as an energy shock remains temporary, its implications for monetary policy may be limited. However, if higher costs become entrenched and begin to feed into inflation expectations, policymakers could face far more difficult trade-offs.
The Fed and the ECB: Different Responses to the Same ShockAlthough they are confronted with the same geopolitical environment, the Federal Reserve and the European Central Bank are approaching the situation differently. In the United States, the Fed must balance its dual mandate of price stability and maximum employment. While higher energy prices and tariffs continue to contribute to inflationary pressures, the country’s high degree of energy self-sufficiency helps limit the direct impact of the oil shock on domestic activity. As a result, the Fed has so far adopted a cautious wait-and-see approach.
Heightened Vigilance in EuropeThe ECB has taken a more vigilant stance toward inflation risks. Europe’s heavy dependence on energy imports, combined with the relatively recent memory of the 2022 energy crisis, increases the likelihood of second-round effects on wages, services prices and inflation expectations. Against a backdrop of already modest growth, the ECB remains particularly focused on the persistence of inflation rather than on energy-driven fluctuations alone.
Reduced Visibility on the Global EconomyWhatever the policy response, one conclusion is clear: the disruption in the Strait of Hormuz has significantly increased economic uncertainty. The outlook for energy prices, inflation and growth will depend largely on the duration of the disruption and the extent to which its effects spread across the global economy.