Key insights
- Oxford Economics suggests heightened attention to inflation amplifies its impact. Geopolitical events like the Iran war, coupled with existing inflation scrutiny, drive up prices due to psychological factors. This leads to increased wage demands and faster price adjustments by firms. The analysis estimates a 0.6-0.7% increase in global prices by 2026 due to this 'high attention' effect, exacerbating existing inflationary pressures reflected in the U.S. CPI.
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Economists at Oxford Economics in an analysis released Wednesday said the Iran war is pushing prices for energy and other things more than it otherwise would if people weren't paying so much attention to it. The analysis shows how inflation can be a psychological phenomenon as well as a physical one—notable at a time when real-world factors including tariffs and the closure of the Strait of Hormuz are also stoking inflation.
"The inflationary impact of the Middle East oil supply disruption is being amplified because it's arriving during a period of intense inflation scrutiny," Daniel Harenberg, lead economist at the research group, wrote in the paper. "Having recently suffered through multiple price shocks, households and firms are now more sensitive to inflationary news."
Economists say that inflation can been pushed higher by attention. In current terms, that suggests that a closely watched war in Iran, which has powered rising energy prices, is driving inflation in both practical and psychological terms.
Economists generally believe people's expectations about inflation affect how they spend their money and make business decisions, which influences actual prices. When inflation expectations are high, the theory goes, workers demand higher wages and businesses raise prices more.
"When inflation attention is high, firms react more sharply to inflationary news and adjust prices faster," Harenberg wrote. "Households revise their inflation expectations more readily, fuelling stronger wage demands."
Harenberg estimated that prices in major economies worldwide will rise 0.6% to 0.7% more in 2026 than they might have otherwise because of the "high attention."
U.S. prices rose 3.8% over 12 months ending in April according to the Consumer Price Index.
A simple way to measure attention is by how much people google the word "inflation." Those searches have risen lately, approaching the level they reached in 2022 when inflation surged to its highest in a generation, Harenberg found.
Still, Harenberg found the attention span of the public is limited, and the "high attention" effect on inflation tends to fade after a year; next year, he estimated, the effect could be in the range of 0.3% to 0.5%. Still, the research suggests the risks of inflation accelerating are greater than most forecasts currently estimate, especially if the Iran war isn't settled anytime soon. If so, the Federal Reserve may have no choice but to raise interest rates to counteract inflation using monetary policy.
"If the Strait of Hormuz remains closed for longer, as seems increasingly likely, the upside risk to inflation and policy rates would rise substantially," Harenberg wrote.
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