The US-Iran war is ramping up fears of a worst-case scenario for the economy

• Stagflation has entered the conversation in markets as investors eye the disruptive impact of higher oil prices.
• The fear is that a sustained increase in oil prices could stoke inflation and slow growth.
• Last week's inflation and GDP data had already stoked concerns about stagflation.

Stagflation has re-entered the chat.

After spooking investors last year amid tariff turmoil, the dire combo of high inflation and weak economic growth is again rearing its head, with the Iran war as the latest driver.

Stagflation is often considered the worst-case scenario for the economy, as it's a more difficult problem for policymakers to solve than a typical economic slowdown. That's because the Fed would be restricted in its ability to cut rates as it would do in a normal recession scenario, because it would risk stoking even more inflation.

Oil prices have been the latest input for inflation arguments this week, while worrying economic data last week has dimmed the outlook for economic growth this year.

Brent crude, the international benchmark, climbed as high as $84 a barrel on Tuesday morning as the Iran war continued for a fourth day.

It marks the highest oil prices since 2024, drawing some comparisons to the oil shocks that sent the economy into a stagflationary spiral in the 1970s. The fear, as it relates to stagflation, is that higher oil prices could contribute to inflation while curtailing economic activity.

José Torres, a senior economist at Interactive Brokers, said he believed the risks of stagflation were "definitely" higher. He pointed to the spike in Treasury yields since conflict erupted in the Middle East over the weekend, a sign that investors are dumping government bonds in anticipation of a hotter inflationary environment and higher interest rates, which can weigh on economic growth.

A rise in Treasury yields in times of geopolitical turmoil is unusual, and the latest spike hints at the inflation fears rising among investors. Rather than pile into bonds as a safe haven, traders are selling Treasurys as they price in the expectation that interest rates will remain as inflation creeps back up.

The yield on the 10-year US Treasury surged to 4.1% Tuesday morning, up 13 basis points since last Friday.

"The cumulative effect of these disruptions is a fresh potential bout of stagflation blowing through the global economy," top economist Mohamed El-Erian wrote on Monday.

Mark Malek, the chief investment officer at Siebert, told Business Insider he's getting "whiffs of stagflation" in the current market environment. He said he would be especially concerned if oil prices were to remain elevated for six months, or if the stock market were to struggle for more than a month.

"You could definitely see consumption pulling back, and that could just be a much bigger problem," he said of a stagflation scenario.

Even before the Iran war kicked off, markets were dealing with fears of higher inflation and lower growth.

Data last week showed real GDP grew 1.4% year over year in the fourth quarter, badly missing estimates of 2.8%.

And while consumer inflation has mostly edged lower, the producer price index, a measure of wholesale prices, rose 0.8% in January, well above the 0.3% expectation.

Those reports were already "concerning" and "pointing toward stagflation," David Russell, the global head of market strategy at TradeStation, wrote in a note.

"A long conflict could entrench inflation expectations and erode business confidence. It could become a stagflationary shock over time, with spiraling prices and job losses at the same time," Russell said on Monday.

Economists at SocGen said they believed global inflation could rise as much as 1 percentage point, while global growth could drop as much as 0.2 percentage points if oil prices remained above $90 a barrel for at least a three-month period.

Strategists on JPMorgan's market intelligence team also said they were eyeing one of the bank's stagflation-themed investment baskets in a note on Monday.

"All of that said, this is a market divorced from fundamentals," the bank wrote, citing the US-Iran conflict as one factor.