Middle East War Poses "Catastrophe" Risk of Stagflation for United States

The Middle East conflict will place the United States on the brink of a new “catastrophe”. The country faces a high risk of falling into the depths of stagflation.

This warning comes from Nobel Prize-winning economist Joseph Stiglitz. Even before the war erupted on 28 February with a series of attacks by the United States and Israel against Iran, Stiglitz said the American economy was already “approaching stagflation”, referring to the problematic combination of high inflation and weak growth.

“There were a number of indicators of slow growth before the war,” he said in an interview at UN headquarters in Europe in Geneva, according to AFP, on Tuesday 17 March 2026.

“This just… pushes us over the threshold,” he emphasised.

The Middle East conflict has practically halted activity in the Strait of Hormuz, which is strategically vital, normally carrying one-fifth of global crude oil supplies and substantial quantities of gas. This has caused oil prices to surge.

Global oil prices have risen 40 to 50 per cent after Iran closed the waterway, attacking energy industry targets and shipping in the Gulf in response to the US-Israel war against the Islamic Republic. This has sparked concerns about shocks to the global trading system, which was already strained by tariff attacks from US President Donald Trump and supply chain fragmentation since the Covid-19 pandemic and Russia’s war in Ukraine.

United States Faces Highest Risk

Furthermore, according to Stiglitz, who jointly won the Nobel Prize in Economics in 2001 for his analysis of markets with asymmetric information, the United States is the country at highest risk of experiencing stagflation. He points to the same situation during oil shocks in the 1970s.

“The stagflation risk appears to be quite high for the US,” said the professor at Columbia University in New York.

“The situation elsewhere is not so clear… Although Europe will certainly face inflationary pressures in the energy sector as well, they also see growth stimulus as they dramatically increase defence spending, after Washington made clear that you cannot rely on the US for your defence,” said the economist who served as chief economist at the World Bank in the late 1990s after chairing the council of economic advisers to US President Bill Clinton.

“Meanwhile, Trump’s policies have significantly weakened the US economy even before the war,” he stressed.

Indicators

There are several indicators that Stiglitz said are concerning. Such as the lack of labour force growth in 2025 and the rise in unemployment last month.

“And, although there is growth, that growth is not balanced,” he said.

“About one-third comes from building artificial intelligence data centres,” he explained, referring to the stock market’s strong performance being dominated by AI and technology companies.

“If you look at other stock markets, conditions are quite sluggish,” he added.

Trump Destroys Confidence

At the same time, Stiglitz also said he expects Trump’s tariff policies to increase inflation.

Normally, when implementing tariffs, a country can expect its currency to appreciate, because the country buys fewer goods from abroad, which should lower inflation. However in this case, he pointed out that “the dollar has weakened”.

“That is because Trump has destroyed confidence in America and the dollar,” he said.

“A weaker dollar means that, instead of lower inflation from tariffs, there is actually higher inflation… Everything we import becomes more expensive in dollars,” he explained further.

Added to this is now inflation from the war, plus greater uncertainty among households and businesses. He stressed that businesses “cannot invest in circumstances like this”.

“They do not know what tariffs will be imposed, (or) how long this war will last. They do not know what energy prices will be,” Stiglitz said.