FTSE 100: Iran Conflict & Inflation Risks – What’s Next for Markets?

The FTSE 100’s recent ascent, which saw it break through 10,000 points at the start of the year and add another 900 points by February, faced a sharp reversal on Thursday, briefly falling below that milestone before closing at 10,063, down 2.3% on the day. The catalyst? A strike by Iran on Qatar’s Ras Laffan complex, a critical facility supplying a fifth of the world’s liquefied natural gas.

The market reaction presents a dichotomy. Is this a proportionate response to escalating conflict, or does the relatively modest dip suggest a concerning level of complacency regarding the potential inflationary consequences of a prolonged war and sustained oil prices above $100 a barrel? The latter interpretation gains traction when considering the FTSE 100’s year-to-date return remains flat, despite a robust 20% gain in 2025.

Nicolai Tangen, head of Norway’s $2 trillion sovereign wealth fund, recently voiced surprise at market resilience, a sentiment echoed by the limited downward pressure on the FTSE despite a significant geopolitical shock. This resilience may stem from the composition of the index itself. The FTSE 100 is weighted towards companies with “Heavy Assets Low Obsolescence” (HALO) characteristics – firms possessing valuable, durable assets less susceptible to disruption from factors like artificial intelligence. These companies, often in the banking and mining sectors, tend to pay dividends and are better positioned to navigate economic uncertainty.

However, the benefits aren’t universal. While Shell and BP have seen their share prices rise by 24% and 31% respectively since the start of the year, benefiting from increased oil and gas prices, the broader economic implications are far more complex. The surge in energy prices is already impacting inflation expectations. David Rees, head of global economics at Schroders, estimates that current oil and gas prices “are already enough to add around 1% to headline inflation in the coming months, while shortages of fertilisers could push food inflation higher later in the year.”

The Bank of England’s decision to hold interest rates steady on Thursday, despite mounting inflation fears, reflects the inherent uncertainty surrounding the conflict’s duration and its ultimate impact on energy prices. Governor Andrew Bailey acknowledged the situation, stating the Bank stands “ready to act as necessary” while simultaneously suggesting that “markets are getting ahead of themselves in assuming rate rises.” This carefully worded statement underscores the difficulty policymakers face in responding to a rapidly evolving situation.

The current market sentiment, as revealed by Bank of America’s fund manager poll, appears optimistic that energy prices will stabilize. The poll found that only 11% of fund managers expect Brent crude to remain above $90 a barrel by year-end, with an average forecast of just $76. However, this consensus view leaves considerable room for error. Should oil prices remain elevated for an extended period, a more aggressive monetary policy response becomes increasingly likely.

The situation demands close monitoring. If oil prices remain at $100 a barrel for another month, the likelihood of interest rate hikes will significantly increase. The coming weeks will be crucial in determining whether the FTSE 100’s resilience is a sign of genuine strength or a dangerous underestimation of the economic fallout from the escalating conflict in Iran. Investors should watch for early profit warnings from companies exposed to rising energy costs and disruptions to supply chains, as these will provide a more accurate gauge of the war’s true impact on the UK economy.