The U.S. economy’s best-case scenario for this year is no longer viable, according to economists at JPMorgan. The bank attributes this to the Iran war and the subsequent inflation surge.
JPMorgan economists have dismissed the “Goldilocks scenario” – a situation where inflation cools, and the economy continues to expand. The bank anticipates that the recent inflation surge, triggered by the Iran war, could lead to a negative growth shock, reported Business Insider on Monday, citing the bank’s Friday note to clients.
The bank warned that rising energy prices could drive core inflation above 3%, exceeding its earlier forecast. Higher oil prices may also raise transportation and production costs, pushing core goods inflation above the Federal Reserve’s 2% target.
JPMorgan slightly lowered its global growth outlook, warning that higher prices could lead to elevated interest rates, weaker consumer spending, and softness in the labor market.
“Risks are elevated that an energy price shock squeezes household purchasing power and depresses business sentiment, raising the specter of a negative growth shock raising unemployment rates,” wrote JPMorgan’s chief economist Bruce Kasman‘s team.
The bank also identified supply chain pressures and wage inflation as potential contributors to a growth shock. It warned that any significant decline in inflation is likely to be preceded by a considerable growth disappointment.
At the time of writing, the Brent crude oil price was trading 1.45% lower at $87.00 per barrel.
Inflation Debate Intensifies Over War
Economist Peter Schiff warned that a prolonged conflict with Iran could cost the U.S. hundreds of billions, or even more than $1 trillion, while sharply increasing inflation. He argued that inflation would be driven less by higher energy prices and more by government borrowing and Federal Reserve money creation used to finance war-related debt.
Moreover, Paul Tudor Jones had highlighted a potential economic crisis due to the U.S. economy’s growing dependency on equity prices. He warned that if market valuations revert to their long-term average price-to-earnings ratios, stocks could crash 30% to 35%, wiping out capital gains tax revenue that accounts for about 10% of U.S. tax collections.
On the other hand, Treasury Secretary Scott Bessent expects inflation and oil prices to fall quickly after a brief spike, once the Strait of Hormuz reopens. He predicted crude prices above $100 per barrel would drop sharply in the coming months due to ample global supply, increased production from energy producers, and strong U.S. output. Bessent said the U.S.’s growing energy production should lower fuel costs and ease inflation, though he cautioned there could still be one or two more elevated inflation readings first.
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