The ongoing conflict between Hamas and Israel has economists concerned about a potential third wave of inflation that begins with an upswing in oil prices and ends with higher grocery bills.

Brent crude prices briefly reached $89 per barrel on Monday amid fears of Middle East tensions, sanctions, and potential oil supply disruptions.

George Lagarias, chief economist at Mazars Consultants, said: “With crude near $90 again, we are risking a third wave of inflation. This could result in prolonged inflation, rates going higher or remaining higher for even longer than anticipated and growth suffering.”

Geopolitical uncertainty fuels oil-price surge

Multiple factors drive the recent oil price surge, chief among them being Hamas's attack on Israel, which has raised concerns about further conflict and its ramifications.

According to Ed Morse, the head of global commodity research at CitiGroup, the recent surge in oil prices is a more immediate reaction than a reliable indicator of the market's future direction.

“We had anticipated a spike as a reflection of really increased risk, but as the market is digesting what’s happening, that’s all potential,” he said. “There’s no indication that oil supply anywhere in the world is under any kind of attack or vulnerable, but there is obviously a higher probability than there was a week ago.”

Safety concerns leading to Israel's Chevron production suspension at the Tamar field have also roiled markets.

European gas prices surged by up to 17% on Monday, impacting the London Stock Exchange, where major energy companies gained nearly 3%.

Economists also worry about a global recession if the U.S. and Saudi Arabia get further involved in the turmoil. Although Israel isn't a significant oil producer, concerns arise over Iran's role in Hamas' attack, which claimed at least 1,000 lives.

Tighter U.S. sanctions on Iranian oil exports could profoundly impact global oil supply.

This potential third inflation wave follows post-Covid supply chain disruptions (first wave) and the Ukraine war and energy crisis (second wave).

Oxford Economics said that if oil prices reach and stay at $95, it could add 0.4 percentage point to global inflation in 2024, reaching 4.6% from the current 4.2%. If prices rise to $110, global inflation could reach 5.1% next year.

Sterling Capital CEO Dennis Mitchell is concerned that if other commodities are affected, it might lead to an increase in prices across the board.

“You’re looking at uranium production, if that’s disrupted then that would put upward pressure on energy prices, not to mention any prolonged conflict would probably put downward pressure on economic growth and expansion globally,” he said.

The broader impact of surging oil prices

Economists say rising oil prices can affect thousands of products due to the global reliance on fossil fuels for transport and production.

As the San Francisco Fed explains, “Oil prices indirectly affect costs such as transportation, manufacturing, and heating. The increase in these costs can in turn affect the prices of a variety of goods and services, as producers may pass production costs on to consumers.”

The downstream effect is weaker consumer confidence and less disposable income to spend on other goods and services. Additionally, businesses may raise prices to offset lower demand.

According to Sonu Varghese, the global macro strategist at Carson Group, one of the most significant risks to the economy is the potential for a sudden surge in gas prices.

The rising price of gas “immediately becomes a problem for two reasons in particular: It may force the Fed to react and raise rates again, and quickly, [and] it reduces households' real income,” Varghese said.

“We saw both play out last year. The economy was resilient enough to get through it, but I'd rather not see the economy battle through that again,” he added.