The October 1973 war in the Middle East was a tipping point that triggered a fourfold increase in global oil prices that amplified the inflation spiral in the Western world, which meant a severe recession and 50 percent fall in stock markets in 1974.
On a smaller scale, Iraq’s invasion of Kuwait and Desert Storm in 1990 also led to an oil shock that exacerbated an economic malaise in the US and Europe into the following year.
That fallout ultimately caused the banking crisis on Wall Street that forced Citigroup to seek a de facto bailout from Saudi Arabia’s Prince Waleed bin Talal in 1991, via a 9.9 percent equity stake in America’s then largest money centre bank.
Will the Iran-Israel conflict and the US air strike on the Islamic Republic’s three most sensitive nuclear sites in the past fortnight – now in tentative ceasefire – trigger inflation shocks and banking stress in the US and Europe as happened after the Yom Kippur War in 1973 and first Gulf War in 1991?
No – even though the 12-day war has had a major impact on oil, gold and commodities, as well as GCC bond and equities markets.
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Mark Twain’s observation that “history rhymes but does not repeat” is eerily relevant for the impact of Middle East wars on inflation and banking crises in the West.
There is no doubt that the war has amplified economic uncertainty since it came just after Trump’s Liberation Day tariff wars against America’s trading partners. Yet two macro events have cushioned the destructive fallout of the war on the American and European economies.
The US and China reached an accord to significantly scale back Trump’s punitive tariffs on the eve of the Israel Defense Force’s initial “shock and awe” air strikes on Tehran, Tabriz, Isfahan and Natanz.
After an initial spike to $80 per barrel, Brent crude plunged as low as $68 once the global energy markets realised that Iran had not mined the Strait of Hormuz to impede tanker traffic from the Gulf to downstream markets in Asia and Europe.
Iran did not launch retaliatory strikes against the energy infrastructure of Saudi Arabia, Qatar and the UAE in response to the Israeli and US airstrikes, thus removing the risk of a supply shock.
The sharply lower US-China supply war and an oil price panic helped to mitigate the risk of an inflation shock in the West, though Federal Reserve chairman Jay Powell said he preferred to “wait and see” and did not cut his policy rate at the June FOMC conclave.
While a temporary rise in US inflation above 3 percent is possible and could delay any Fed rate cuts until the autumn, there is no chance that the Iran-Israel war of June 2025 will trigger an inflation nightmare or banking shock on Wall Street, City of London or Europe’s stock market.
In fact, the Nasdaq Composite index, America’s most risk-sensitive tech stock index, actually reached an all-time high when Trump announced a ceasefire between Israel and Iran and did not sell off even after the ceasefire was violated by both Tehran and Tel Aviv.
The 1970s inflation had its origins in President Lyndon B. Johnson’s refusal to raise taxes to finance both the Vietnam War and his Great Society social programmes. The Federal Reserve was unable to offset the surge in money supply with draconian interest rates until the arrival of Paul Volcker as Fed chairman in late 1979. Oil was a far bigger factor in the industrial economies of the 1970s than it is in the post-industrial economies of the West in 2025.
US money centre banks were crippled in the 1970s by excessive dubious sovereign loans to Latin America and inadequate capital cushions, a situation that simply no longer exists today.
In fact, the shares of J.P. Morgan, Bank of America and Citigroup flirted with all-time highs on the New York Stock Exchange in the last week of June 2025, even as Israel and Iran launched missile strikes against each other’s cities in violation of Trump’s ceasefire.
The US Central Bank’s policy rate (Fed funds) is 4.375 percent while US consumer inflation is 2.5 percent. So monetary policy is restrictive now, not as ultra-accommodative as it was in the 1970s.
The risk of a banking crisis is also minimal, since credit spreads and default metrics have not risen during the June war between Israel and Iran.
The Iran-Israel war, while it adds to global economic uncertainty, will not cause an inflation shock or banking crisis in the US and Europe, unlike the case in October 1973 or February 1991.
Matein Khalid is an investor in global financial markets and board adviser to leading family offices in the UAE and Saudi Arabia
