# Why the Gulf War Bears Are Wrong on Oil and Inflation

_Neil Woodford argues the consensus on the Gulf war's economic impact is too bearish — oil at $96 in real terms is far from crisis territory, and UK inflation is set to fall, not spiral._

Neil Woodford · 10 April 2026 · 7 min read

![Iranian women wave national flags as people gather in Tehran’s Revolution Square after the United States and Iran agreed to a two-week ceasefire, on April 8, 2026. Atta Kenare/AFP via Getty](https://cdn.sanity.io/images/v3acfbvo/production/620c633acf6ca3bb9066562c8d247ad63d45c123-1280x853.jpg?w=1600&fit=max&auto=format)

---

Once again this has been quite a dramatic week for geopolitics and financial markets. Against the flow of doom-laden consensus commentary, the US and Iran did agree to a ceasefire and although skirmishes have continued in the Gulf and in Lebanon, it appears to be holding. Clearly, both sides had something to gain from the ceasefire, as a potential prelude to a more permanent peace settlement, and a lot to lose from continuing with the war — something which the media I have read in recent weeks seemed to ignore.

Much like the consensus commentary on other major global events, most of what is written is distorted by the predetermined political lens of the authors, and so impartiality and common sense rarely make an appearance. It seems in such a polarised western world there is no room for, or even any attempt at, objectivity. Witness the new doom-laden commentary of the last few days deriding the ceasefire as yet another example of this kind of narrative. Financial media is also pregnant with articles highlighting the long-term scarring that this war is going to inflict on the global economy. This is another one-eyed perspective that in my opinion ignores the much longer-term deflationary influences playing out in energy markets and the relatively muted characteristics of this crisis compared with previous episodes in the Middle East. Perhaps this is best illustrated by this chart which shows the oil price in real terms, i.e. adjusted for inflation, over the last sixty years. Clearly, $96 per barrel is uncomfortable but that is under half the price reached in 2008 and not far short of half the level achieved in November 1979. It's also interesting that in the aftermath of every price spike, the oil price falls significantly, and frequently, almost immediately after the spike up.

I thought it was interesting in this context to highlight that in the same newspaper that was carrying bearish commentary about the longer-term stagflationary consequences of the war and its impact on energy prices, there was another article highlighting the very reason why I believe that the consequences of this war are likely to be deflationary for oil and gas prices. In it the journalist was writing about Mexico's plans to more than double its natural gas production by exploiting reserves that it had previously avoided using for environmental reasons — from its shale, tight and deepwater gas reserves — to reduce its dependence on imported gas from the US. The Mexican president, Claudia Sheinbaum, a former climate scientist, is quoted in the article as saying that the Iran war had hastened a rethink on these 'unconventional gases'. The point here is that Mexico will not be alone in rethinking its energy policy in the aftermath of this latest Middle Eastern conflict. (Maybe even Mr Miliband might descend from his virtue-signalling eyrie, and give Claudia a call!)

## UK updated thinking

As for the war's impact on the near-term inflation picture in the UK, here too, not surprisingly, the bears have once again been over-egging the pudding. In the very near term, March's inflation rate is likely to reach about 3.25%, slightly higher than the 3% recorded for January and February, reflecting the fact that over the month petrol prices averaged about 140p. More recent data shows the average to be about 155p across the country which, if sustained, will outweigh the reduction in the energy price cap. Nevertheless, because of base effects, inflation should still fall in April. Over the summer it's likely that food prices may rise a little and if the government allows the energy price cap to reset in July, then based on where oil and gas prices are now, CPI should average about 3.5% through the summer before starting to fall again towards the end of the year. I still see it returning to 2% in the first half of next year.

Market interest rate expectations have rates rising a bit to about 4% this year. I still think this is wrong. I don't believe the MPC will make the mistake of raising rates and will probably sit on their hands until inflation starts to fall again, when the cutting cycle will restart. Just to put all of this into context, inflation averaged about 3.4% last year and peaked at 3.8%. Since when, the labour market has weakened (higher unemployment at 5.2%, lower vacancies and lower wage settlements) and the economy has flatlined for about nine months. Quite clearly the economy needs lower interest rates, principally because it is overtaxed (over-regulated) and excessively high rates have incentivised saving and depressed spending.

As for the question — should the government intervene to help households with rising energy bills — there are some important points to make. Instinctively, I would argue no, the stresses are not sufficiently large to warrant this type of intervention. Nevertheless, if the government were to decide to roll over the energy price cap until October (so for six months rather than three), this would mean that the CPI would not increase to 3.5% and would likely stay lower for longer, peaking at a lower rate and declining sooner. Under this scenario the cost would approach £2bn (compensation paid directly to the companies supplying energy to households) but of course some better-off households would also benefit from lower bills. The upside for the government and taxpayers is that a lower CPI in September (the price cap would reset in October) would translate into lower debt interest payments (on index-linked gilts) and a lower indexation of welfare payments and benefits. (Welfare spending, including the state pension, in 27/28 is budgeted to be £363bn.) In other words, the £2bn cost of intervention would yield savings of up to about 2.5 times this figure, mostly in lower debt interest payments.

Will this government take this sensible course of action to intervene in the energy market to save money for taxpayers? Unfortunately, probably not because its political instincts I am told are offended by giving money to the 'broad-shouldered', and so if they do anything the benefit will be means-tested, incurring more cost and bureaucracy. It will also mean that the CPI will be higher in September and consequently so will debt interest costs and benefits and state pension costs next year. In other words, the triumph of political posturing over the interest of taxpayers.

## Gulf war update

Before signing off this week's update I thought I should briefly share my thoughts on the Gulf war ceasefire and its potential longevity. The ceasefire is undoubtedly good news and should lead to the start of normalisation of traffic through the Straits of Hormuz, albeit that normal oil and gas production and supply from the region may take months to restore. Having said that, the two parties are far apart and finding common ground in Pakistan is going to be difficult to achieve. However, I do believe that the ceasefire suits the protagonists and both Iran and the US have much to gain from peace and equally also much to lose from continued conflict. That is why I believe, probably against the odds, that the ceasefire will endure, albeit nervously, and probably way beyond the next two weeks. As for a more permanent peace deal, that is some way off in my judgement but is also an objective that suits both the US and the Iranian regime.

Just by way of comparison, today there is some news emerging on Europe's 'forgotten' war. Against all the odds it appears as if there may be a move towards a peace agreement between Russia and Ukraine, at least according to Ukraine's top negotiator with Russia. He is quoted on Bloomberg as saying that a resolution to the war may not take long to achieve. Although, understandably, there is much scepticism, and certainly on the Russian side, this seemingly totally intractable conflict might also be moving at least towards a ceasefire.

## What to look out for next week

Next week I expect a little more attention to be paid to macroeconomic data and to the slightly busier corporate calendar. Today's US CPI data has grabbed some attention and showed core and CPI inflation had risen in March but in both cases the outturn was lower than had been expected. This has not been reflected in the government bond market which is a little weak today but should be welcomed by policymakers nonetheless.

Next week is busier than this and includes more US inflation data and jobless claims, and in the UK most attention will be focused on February's GDP print. This obviously pre-dates the start of the conflict in the Persian Gulf and follows a number of disappointing releases. My guess is that it will show that at the start of this year the UK economy was showing slightly better momentum which is likely to have been arrested in March. Either way, the evidence I am sure still points to the need for lower rates.

After a quiet few weeks for company results, next week is slightly busier and for all sorts of reasons Tesco's full-year numbers will attract quite a lot of attention not just from analysts but also from the MPC and, I would imagine, from the Chancellor. I expect they will be eager to understand what Tesco is saying about the war's impact on food prices and what its policy will be with respect to passing them on to consumers over the summer.