War Reignites Global Stagflation Risk

The war is reviving stagflation risks for the global economy, combining the twin threats of slowing growth and rising inflation that policymakers have few clean tools to address simultaneously. Stagflation is particularly damaging because the conventional monetary policy response to inflation, raising interest rates, deepens the growth slowdown, while stimulus measures risk entrenching price pressures further. The mechanism is well-established: conflict disrupts commodity supply chains, pushes energy and food prices higher, and erodes consumer purchasing power, all while business investment contracts under uncertainty. Central banks in affected economies face a narrowing policy corridor, forced to weigh inflation credibility against recession risk. For markets, stagflationary environments historically compress equity valuations, widen credit spreads, and pressure emerging market currencies reliant on commodity imports. The episode to watch is whether energy price shocks prove transitory or embed into wage and services inflation, which would materially constrain the policy response and extend the period of below-trend growth.