European Central Bank (ECB) president Christine Lagarde didn’t mince words when asked about the status update on inflation. “We’re not done yet,” she told Greece’s Antenna TV this week.

Reading between the lines, Lagarde implied that interest rates would need to stay higher as policymakers evaluate what's preventing inflation from coming back down to the ECB’s 2% target.

“We need to look at prices and wages and profit units and all that to see where the risks are,” Bloomberg reported her saying.

While Lagarde seemed confident that central banks would eventually curtail inflation, she warned that Middle East tensions might throw a wrench into their plans.

The threat of rising oil prices

Lagarde said she was “very attentive” to the mounting geopolitical risks in the Middle East, which could trigger another upswing in oil prices that would make inflation harder to manage.

The price of oil is currently hovering around $90 a barrel, but experts warn it could spike to $150 if the conflict between Israel and Hamas ignites a regional war.

Oil wouldn’t need to go up that much to inflict immediate economic damage.

According to JPMorgan Chase, economic growth would come to a halt if oil reached $120 a barrel. And that prediction was made before the latest inflammation of the Israel-Palestine conflict.

“We estimate that if this were to happen in the coming weeks, and were attributable entirely to supply cuts, the global economy would slow to a near stall next quarter,” JPMorgan’s strategists said.

The U.S. may be especially vulnerable to oil-price spikes after President Joe Biden implemented a historic 180 million-barrel drawdown of the nation’s Strategic Petroleum Reserve.

This means further price increases can’t be immediately offset by existing supply stashed away in reserve.

Government economists reported that higher oil and gas prices were a “major contributor” to inflation over the last two months.

The inflation fight has a high cost

In response to post-Covid inflation, central banks have jacked up interest rates at the fastest clip since the 1970s. Although the hikes were necessary, they have gone "too high far too quickly," according to the International Monetary Fund (IMF).

“We have spent the last 20 years living frankly in terms of interest rates in fantasy lane,” said IMF managing director Kristalina Georgieva. “It is actually going to normal to have interest rates that are in positive territory.”

She acknowledged that aggressive rate hikes are “working” to bring inflation down, but unfortunately, it’s “not going down fast enough.”

As a result, the IMF expects the global economy to slow over the next two years, with the U.S. forecast to post a meager 1.5% growth in 2024.