Geopolitical risk is back in inflation pricing — and the Strait of Hormuz is now the market’s key fault line.

While President Donald Trump believes the chokepoint will reopen “very soon,” Goldman Sachs warns a prolonged disruption could push U.S. inflation to 4.9% as early as this spring — a shock that would derail the Fed’s path back to its 2% target.

Markets aren’t waiting.

Traders on Polymarket are already assigning near coin-flip odds to a Consumer Price Index (CPI) print above 3.4% for the current month, signaling growing hedging against a renewed oil-driven inflation surge.

Goldman’s Three Iran War Scenarios and What Each Means for US Inflation

Goldman Sachs US Economics Analyst Jessica Rindels structured the firm’s analysis around three trajectories, each tied to how long the Strait remains closed and whether the conflict permanently damages Gulf energy infrastructure.

In the baseline scenario, disruption lasts six weeks, Brent crude averages $115 in April and retreats to $80 by year-end. Headline Personal Consumption Expenditures (PCE) inflation — the Federal Reserve’s preferred gauge — closes 2026 at 3.1%, already a full percentage point above Goldman’s pre-war forecast.

In the adverse scenario, a 10-week closure pushes Brent to $140 and headline PCE to a spring peak of 4.6%.

In the severely adverse scenario, infrastructure damage compounds the disruption: Brent hits $160, eclipsing the 2008 record, and PCE peaks at 4.9%.

How The Iran War Travels From The Gulf To The Gas Pump — and the Grocery Store

“A 10% increase in oil prices raises headline PCE inflation by 0.2pp and core inflation by 0.04pp,” Rindels wrote, “with much of the impact coming through transportation services.”

Less visible is a second channel: the war has disrupted Gulf exports of nitrogen fertilizer, aluminum and petrochemicals. Goldman expects higher fertilizer costs to push PCE food prices up about 1.5% this year — but the hit is back-loaded.

“We expect the boost to food prices to begin in mid-summer,” Rindels added, because farmers had already purchased spring inputs before the conflict started.

Prediction markets on Polymarket now price a 97.8% probability that inflation tops 3% at some point in 2026, treating Goldman’s baseline as a floor rather than a forecast.

The above-4% bracket — consistent with Goldman’s adverse scenario — sits at 46%, up sharply since the war began.

What Goldman’s Inflation Call Means For Investors

Goldman still expects two 25-basis-point cuts in September and December, arguing that the labor market will deteriorate enough — with unemployment rising to 4.6% — to force the Fed’s hand despite elevated prices. But the bank now assigns a 25% probability to a full-year hold.

“While the risk that the Fed could instead remain on hold all year has risen somewhat,” Rindels wrote, “our probability-weighted Fed forecast remains meaningfully more dovish than market pricing.”

Prediction markets have already moved well past Goldman’s base case. On Polymarket, the probability of no rate cuts in 2026 has soared to 30%, becoming the most likely scenario.  

For investors, a sustained inflation overshoot combined with a Fed on hold is the worst of both worlds — growth slowing but rates staying high, compressing valuations across rate-sensitive stocks.

Since the start of the war, the S&P 500 – as tracked by the SPDR S&P 500 ETF Trust – has fallen by about 4%.

In 2022, inflation spikes and aggressive Fed hikes hit equities hard, dragging the S&P 500 down nearly 20%.

Image created using artificial intelligence via Midjourney.