Suppose we get a durable resumption of reopening of the Strait. Oil prices will likely stay elevated for some time (resumption of normal conditions maybe 3-4 months, oil-wise). Assuming the current Cleveland Nowcast for April CPI is correct, what will inflation have to be for the rest of the year to hit pre-War trend?
Figure 1: CPI all urban, April observation Cleveland Fed nowcast of 4/17 (bold black, left log scale), 2025-26M02 stochastic trend (light gray, left log scale); PCE deflator, March observation Cleveland Fed nowcast of 4/17 (dark red, right log scale), 2025-26M02 stochastic trend (light red, right log scale). Source: CPI, BEA via FRED, Cleveland Fed, and author’s calculations.
A m/m annualized inflation rate of 1.5% for May through December would restore the CPI level to the 2025M01-26M02 stochastic trend. For comparison, headline inflation (calculated in log terms) was 2.4% as of February.
I’ve seen press reports suggesting some oil and gas facilities in the Gulf may take up to 5 years to be fully repaired. Getting Gulf tanker traffic back to normal will certainly take less time than repairing the damage done by bombs, but supply may be constrained for longer than 3 to 4 months. And inventories will need to be restocked, meaning demand higher than before the war.
As with any interruption in activity, some output will be lost forever, some caught up. The catching-up part will also add to demand for a time.
The futures curve shows oil prices above their pre-war level for a few years:
https://www.marketwatch.com/investing/future/clz29