War fuels inflation risks as IMF urges prudent fiscal response

The economic fallout from the war in the Middle East is widening well beyond the battlefield, with the International Monetary Fund warning that the shock is likely to mean higher prices, weaker growth and tougher policy choices for countries already burdened by record debt. The IMF says the impact is highly uneven, with major energy importers, poorer economies and countries with limited reserves facing the greatest risks.

At the heart of the disruption is energy. The IMF says the de facto closure of the Strait of Hormuz and damage to regional infrastructure have created the biggest disruption in the history of the global oil market, citing the International Energy Agency. Around 25% to 30% of global oil and roughly 20% of liquefied natural gas normally pass through Hormuz, making the chokepoint critical not only for Asia but also for parts of Europe.

That matters acutely for large fuel-importing economies across Asia and Europe, which are now absorbing higher fuel bills and rising production costs. Countries in Africa and Asia that rely heavily on imported oil are finding access to supplies increasingly difficult, even when they are willing to pay more. The IMF’s assessment is stark: whatever path the conflict takes, the likely outcome is some combination of higher prices and slower growth. A short war could send oil and gas prices surging before markets adjust, while a longer conflict could keep energy structurally expensive for import-dependent economies.

For Thailand, the inflation risk is becoming harder to ignore. According to data cited from the Trade Policy and Strategy Office under the Commerce Ministry, the largest weighting in the consumer price index is housing at 24.66%, followed by prepared food at 16.27%, while fuel carries a 7.26% weighting. In February, before the Middle East conflict escalated, prepared food prices were up 1.54% year on year, while fuel prices were still down 9.96%. That means a sustained jump in imported energy costs could quickly alter Thailand’s inflation picture and make price control more difficult.

The pressure does not stop at oil. The IMF says parts of the Middle East, Africa, Asia-Pacific and Latin America are also being hit by higher food and fertiliser prices alongside tighter financial conditions. Low-income countries are especially exposed to food insecurity, and some may need more external support.

The war is also reshaping global supply chains. Tankers and container ships are being rerouted, raising freight charges and insurance costs while extending delivery times. Flight disruption around major Gulf hubs is also complicating tourism and global commerce. On top of already elevated commodity prices, that adds another layer of cost for governments, businesses and households.

Fertiliser is one of the clearest examples. Roughly one-third of fertiliser shipments move through the Strait of Hormuz, and any disruption there is amplifying fears over food prices. The timing is especially sensitive because the interruption comes at the start of the planting season in the Northern Hemisphere, threatening crop yields and harvests later in the year. For poorer countries, where food accounts for a far larger share of household spending, the consequences could stretch well beyond economics into social and political instability.

Other industrial inputs could also tighten. Gulf states are major suppliers of helium, which is used in products ranging from semiconductors to medical equipment. Indonesia, which produces about half the world’s nickel used in electric vehicle batteries, could also face sulphur shortages needed for metal processing if trade dislocations deepen.

The inflation threat is therefore broader than just a spike at the petrol pump. Historically, prolonged rises in oil prices have pushed inflation higher while dragging on growth. Over time, more expensive transport and production filter through into the prices of finished goods and services. For countries that had only recently brought inflation closer to target, the war risks reopening an unwelcome new round of price pressure.

The IMF also warns of a second-round danger: inflation expectations. If households and businesses come to believe high inflation will persist, they may start building that assumption into wages and prices, making inflation much more difficult to control without causing a sharper economic slowdown.

Financial markets are already reflecting some of that stress. Global share prices have fallen, bond yields have risen across major advanced economies and many emerging markets, and volatility has increased. Although the sell-off is still more limited than in some past global crises, the result is a renewed tightening of financial conditions.

That is where debt becomes central. Many countries were already grappling with historically high debt loads before this latest shock. The IMF has separately warned that mounting public debt and higher interest rates are forcing increasingly difficult trade-offs, leaving governments with less room to cushion fresh external shocks. Its broad advice is that responses must be tailored carefully to each country, with particular caution for those with limited reserves and little fiscal space.

For Thailand and many other import-dependent economies, the message is clear: the war’s economic damage is now travelling through fuel, food, fertiliser, trade routes and financial markets at the same time. And for governments already managing stretched budgets, the challenge is no longer just inflation itself, but how to contain it without worsening debt vulnerabilities or choking off recovery.