By Thorsten Polleit

 The ongoing war in Iran is raising serious concerns among investors, particularly about the risk of an oil price shock—that is, sharply rising oil prices that could fuel higher inflation and accelerate the devaluation of fiat currencies like the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, to name just a few.

Let’s start with a fundamental question: What is inflation? The term “inflation” is used all the time, but people often mean very different things by it. So, first, let’s clarify the definition.

Most people think of inflation presumably as a sustained, broad-based increase in the prices of goods and services. In this view, inflation represents a loss of purchasing power for money: over time, your money buys less and less because everything gets more expensive.

From an economic perspective, however, it’s useful to distinguish between goods price inflation (rising consumer prices) and money supply inflation (an increase in the quantity of money). The distinction becomes clear when we examine the causes of inflation.

There are essentially two main explanations for what causes inflation. The first is the non-monetary explanation. Proponents argue that inflation stems from excess demand or rising costs. If demand outstrips supply, prices rise—this is often called demand-pull inflation. Alternatively, if production costs increase (for example, higher wages or raw material prices), companies pass those costs on to consumers, leading to cost-push inflation.

The second is the monetary explanation of inflation. Here, inflation occurs when the central bank expands the money supply faster than the economy’s output of goods and services. As the famous economist Milton Friedman (1912–2006) put it: “Inflation is always and everywhere a monetary phenomenon.” Those who favour the monetary view—and there are strong, compelling reasons to do so—see money supply inflation as the root cause and goods price inflation as the symptom or effect.

As mentioned earlier, the war in Iran has already driven a sharp rise in oil prices, along with other energy sources like natural gas. The West Texas Intermediate (WTI) crude oil price is currently around $100 per barrel (as of March 14, 2026), compared to just under $67 on February 27, 2026.

For historical context: During the first oil crisis in the early 1970s, prices quadrupled from about $3 to $12 per barrel. In the early 1980s second crisis, they roughly doubled to nearly $40. And during the Gulf War in the early 1990s, prices also doubled. The current increase—roughly 50 per cent so far—doesn’t yet qualify as a full “shock” by those historical standards.

The important question in this context is: How does a rising oil price fit into our understanding of inflation? A sustained increase in oil prices will almost certainly push up officially measured consumer price inflation, as past experience shows. But viewed in isolation, this is primarily a cost-push effect—with very different consequences from money supply-driven inflation.

Here’s why: If oil prices double, people and businesses can only maintain their current energy use by cutting back on other goods and services. Economists call this a negative real balance effect: higher oil prices make consumers and producers poorer in real terms. As a result, energy prices rise, but prices for other goods (whose demand falls) tend to decline or stabilize. Overall, we don’t see a sustained, broad-based rise in goods prices—true inflation doesn’t take hold.

The picture changes dramatically, however, if the central bank responds to the oil price shock by expanding the money supply. More money allows people to sustain their energy consumption without slashing demand elsewhere. The outcome: all goods prices rise, and the purchasing power of money falls across the board.

In simple terms: An oil price shock without money supply expansion has a recessionary effect. Any price increases are limited and often offset by falling demand elsewhere. An oil price shock with central bank money creation softens the immediate economic pain but fuels higher goods price inflation—and eventually leads to production and job losses when that inflation must later be curbed.

Let us look ahead: What should we expect for goods price inflation? First, recognize that today’s fiat money system is inherently inflationary by design. It systematically erodes the purchasing power of money—that’s built into how it operates. To mask this reality and prevent people from abandoning fiat currencies, governments and central banks publish statistics that understate true inflation and the real loss of purchasing power.

Also, people are constantly told that central banks are “fighting inflation,” even though they are the creators of goods price inflation, as a result of their ongoing money supply expansion. Central bankers may speed inflation up or slow it down at times, but they do not fight it—such a claim would be simply false.

In this context it is important to note that the chronic fiat money inflation benefits the state and its favoured special interest groups groups (cronies), while the broader population pays the price through reduced purchasing power.

In the face of an oil price shock, you might want to expect the following: Central bankers do not prioritize preserving the purchasing power of money. Instead, their prime motivation will be on keeping heavily indebted governments liquid and funded. And here’s how such a scenario may unfold:

Higher energy costs reduce consumers’ and producers’ real purchasing power. Demand for non-energy goods collapses. Companies cut production (or go unprofitable), and the economy slides into recession. Government spending rises (for, say, unemployment benefits), while tax revenues fall.

Politicians borrow even more to fill the gaps. To ensure these over-indebted states can borrow cheaply, central banks cut interest rates artificially, create more money (in cahoots with commercial banks), and—eventually—goods prices rise.

If investors sell their government bond holdings during an oil price shock scenario, bond yields would be pushed up, potentially causing a debt crisis. To prevent this, the central bank steps in to buy bonds (openly or covertly), raising bond prices, suppressing yields, and paying with newly created fiat balances—translating into goods price inflation.

Of course, central bankers, politicians, and aligned economists will scramble for scapegoats. They’ll blame the oil price shock itself for high inflation—not the money supply increase they orchestrated—, and they’ll insist bond purchases aren’t “printing money to finance debt” but merely “stabilizing the system.”

What’s crucial to remember: Higher goods price inflation conveniently debases public debt in real terms—at the expense of savers and everyday money holders. This works best, of course, when governments can convincingly shift blame elsewhere and the public doesn’t fully grasp the deception and wealth transfer involved.

Given the prevailing fiat currency system and the political-economic incentives it creates, a genuine oil price shock would, especially in view of the over-indebtedness in many countries, most likely drive goods price inflation considerably higher for the foreseeable future, accelerating the debasement of the purchasing power of money; and the increase in goods price inflation would not be caused by the increase in oil prices per se, but because of central banks’ ramping up the quantity of money.