War, Inflation and Fed Policy

By SBE Council at 10 April, 2026, 5:43 pm

by Raymond J. Keating -

Yes, war in a key energy producing part of the world will drive up inflation. This isn't exactly a great revelation. The question that no one really knows the answer to is: How high will inflation go and for how long?

The latest Consumer Price Index report from the U.S. Bureau of Labor Statistics has quantified the initial inflation hit with the Iran war. That is, inflation spiked to 0.9 percent in March. Yikes.

Certain economists, policymakers and talking heads like to focus on so-called "core inflation." Core inflation means taking inflation - which is a rise in the general price level - and removing two key factors - food and energy. Why? Well, food and energy often can get volatile and untidy. Never mind that food and energy matter a great deal to the average person, and ignoring these key inflation factors means that inflation itself is effectively being ignored. Yes, food and energy prices might be volatile and untidy, but that's life and often how our economy works.

In March, this "core inflation" registered only 0.2 percent. So, all is well, right? That's what many "experts" might declare. But, again, small businesses, investors and families have a very different take, as they must function in the real world.

The harsh reality is that March's 0.9 percent inflation rate was the hottest since June 2022. And over the past three months, the annualized inflation rate has come in at roughly 5.6 percent.

Obviously, whenever the Iran war and related matters in the Middle East reach some kind of relief or stability, energy costs will come down, providing relief on the inflation front. However, as I and many other economists have pointed out over the decades, inflation is hard to get under control once unleashed. And that is particularly the case when the monetary authority -the Federal Reserve - has been running loose money for an extended period of time. The Fed has been doing that since 2008.

Currently, we're left hoping that the war will be short, and the effects on inflation will not be lasting. At the same time, we also must acknowledge what the private sector - namely, entrepreneurs, businesses and investors - has amazingly accomplished during this decade in terms of countering exogenous events and governmental policies that feed inflation - i.e., the pandemic and the government's response, loose money, and high tariffs. And now, war and its aftermath are added into this troubling brew.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. He is the author of " The Weekly Economist " book series, and 10 Points from Walt Disney on Entrepreneurship .