input into almost every aspect of the economy, oil price shocks prove to be particularly dangerous in this respect.
The 1970s provide one of the clearest examples. In many countries, central banks put too much weight on realizing economic goals and let inflation run higher in the name of growth and employment, effectively accommodating oil shocks. Unsurprisingly, credibility eroded as the public stopped believing that price stability was a priority for central banks. By contrast, the Bundesbank and the Swiss National Bank acted swiftly on inflation and kept core inflation well below what the U.S. and U.K. were experiencing. As a byproduct of their actions, they built reputations that allowed them more flexibility in later crises. Paul Volcker’s disinflation in the early 1980s, often described as “shock therapy,” underlined the costs of letting credibility slip too far: once credibility is badly eroded, restoring it may require economic pain.
Policy implications
While this episode is not the same as the oil shock of the 1970s, central banks face a similar challenge. If they lean too heavily on the idea that this is just another temporary supply shock, they risk repeating the transitory mistake and allowing inflation expectations to drift higher. But if they tighten too aggressively into an energy-driven shock, they risk deepening the hit to real incomes, investment, and employment when growth is already weakening.
Passing the test will require a more careful balance. That means being explicit that higher energy prices will not be allowed to feed into long-run inflation, while focusing decisions on measures of underlying inflation and expectations rather than chasing every move in oil. That may be why Kevin Warsh wants the Fed to pay greater attention to measures such as trimmed- mean inflation, arguing that policymakers should focus on the underlying trend rather than one-time changes driven by geopolitics. But that strategy will only work if the public believes it reflects discipline rather than another excuse to delay action. In that sense, the Iran war is not just an energy shock. It is a live test of whether central banks can rebuild trust while managing the trade-off between inflation and growth.
JP Steiner Associate Economist, ADM Investor Services Inc. E:
john.steiner@
admis.com
References 1. Kilian, Lutz, Michael D. Plante, Alexander W. Richter, and Xiaoqing Zhou. The Impact of the 2026 Iran War on U.S. Inflation: A Scenario Analysis. Working Paper 2609, Federal Reserve Bank of Dallas, Apr. 2026. Federal Reserve Bank of Dallas. Accessed 4 June 2026.
2. Richter, Alexander W., and Xiaoqing Zhou. “Implications of the Iran War for U.S. Inflation.” Dallas Fed Economics, Federal Reserve Bank of Dallas, 16 Apr. 2026. Accessed 4 June 2026.
3. “‘Mild Stagflation’: Bank of America Rips Up Economic Forecasts, Braces for $100 Oil All Year on Iran War Disruptions.” Yahoo Finance, 31 Mar. 2026. Accessed 4 June 2026.
4. “Surveys of Consumers.” University of Michigan Surveys of Consumers, University of Michigan. Accessed 4 June 2026. 5. “Inflation Scenario with De-Anchoring.” Scotiabank Global Economics: Insights & Views, 1 June 2026. Accessed 4 June 2026. 6. Bordo, Michael D., and Pierre L. Siklos. Central Bank Credibility: An Historical and Quantitative Exploration. NBER Working Paper 20824, National Bureau of Economic Research, Jan. 2015. NBER Working Paper Series. Accessed 4 June 2026.
Disclaimer This article is provided for general information and commentary purposes only and does not constitute investment advice, a recommendation, or an offer to transact in any financial instrument. Views expressed are those of the author and may be subject to change.
Source: University of Michigan
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