Stagflation risk is real and rising

The head of the International Monetary Fund on Monday defined the direction of glbal economic travel with unusual clarity.

“All roads now lead to higher prices and slower growth,” said managing director Kristalina Georgieva in an interview.

The IMF had expected global growth of 3.3% in 2026. Six weeks of war centred on Iran and the disruption of the Strait of Hormuz have already forced a rethink. Markets have registered the shift in forecasts.

But, pricing across assets still looks incomplete given where the pressure is most intense.

Asia sits at the centre of that pressure, and the reason is structural rather than cyclical.

Stagflation—rising inflation alongside weakening growth—requires a shock that pushes costs higher while constraining output.

The current energy disruption does both, and Asia’s dependence on imported fuel ensures the transmission is immediate and broad. Roughly a fifth of global oil flows through the Strait of Hormuz and disruption has driven a sharp repricing in crude, lifting volatility and embedding a geopolitical premium into energy markets.

In Asia, that repricing moves quickly through the system. Energy costs feed directly into electricity, transport, petrochemicals and food production.

Inflation, therefore, broadens rather than remaining contained, reaching households and businesses almost simultaneously.

Equity markets tied to consumption and manufacturing are already beginning to reflect this shift as margins come under pressure and earnings expectations adjust.

At the same time, those rising costs are weighing on activity in ways that are becoming increasingly visible.

Industrial economies across the region are adjusting under strain.

South Korea has been forced to secure alternative crude supplies while managing reduced efficiency in refining and petrochemical output.

India has pushed through higher domestic fuel prices as import costs rise, feeding inflation while weakening demand.

Airlines across the region a are cutting routes and adjusting operations as jet fuel tightens, offering a clear signal that supply constraints are feeding directly into economic activity. Transport, logistics and manufacturing names face a difficult combination of higher costs and softer demand.

This interaction is what elevates the current environment into something more complex.

Inflation is rising because supply has been disrupted. Growth is slowing because that same disruption is increasing costs and limiting production.

Both forces are moving together, and neither can be addressed without intensifying the other. Markets tend to respond poorly to this combination because it undermines both earnings visibility and policy clarity at the same time.

Export-driven economies depend on competitive cost structures. Higher energy prices erode that advantage quickly, pushing up the price of goods and reducing demand in external markets. Domestic consumption offers limited support as households face rising living costs.

The result is pressure on both external and internal growth, while inflation continues to build. Cyclical sectors, particularly those exposed to global trade and discretionary spending, are vulnerable in this environment.

As ever, crrency dynamics reinforce the cycle and add another layer of risk.

As energy import bills rise, trade balances weaken. Several Asian currencies —including the Indian rupee, Indonesian rupiah and Philippine peso— are already under pressure. A weaker currency raises the local cost of imported fuel, feeding further into inflation and complicating policy responses.

Currency volatility introduces additional uncertainty for capital flows and asset allocation decisions, particularly in emerging markets where external balances are more fragile.

Policy responses offer limited room for manoeuvre, which adds to the uncertainty embedded in markets.

Central banks face a tightening constraint. Raising interest rates to contain inflation risks accelerating the slowdown already underway. Holding rates allows inflation to become more entrenched. Fiscal intervention can cushion households temporarily, yet it comes at the cost of wider deficits and potential currency weakness, feeding back into higher import costs. The absence of a clean policy solution tends to elevate risk premia across asset classes.

The exposure varies across the region, but the direction is consistent.

Japan, South Korea and India remain heavily reliant on imported energy and are already seeing rising costs filter through their economies.

Southeast Asia faces additional pressure through tighter fiscal positions and sensitivity to capital flows. Economies with weaker external balances are under sharper strain as fuel costs rise.

China retains greater policy flexibility, yet higher energy prices still feed into producer costs, and any slowdown in Chinese industrial activity transmits across regional supply chains. Regional equity and credit markets are unlikely to remain insulated if that transmission strengthens.

Markets continue to frame the Iran conflict as a geopolitical development with economic implications. In Asia, that distinction has already blurred.

The economic impact is visible in pricing, production and policy constraints, and it is feeding through to asset valuations in a way that suggests further adjustment is likely.

Six weeks of disruption have been sufficient to shift behaviour.

There is, however, a more constructive layer emerging beneath the immediate stress.

Higher energy prices are accelerating diversification strategies that had already begun to take shape.

India and Southeast Asia are increasing LNG procurement from outside the Gulf, while Japan and South Korea are drawing more heavily on strategic reserves and long-term supply agreements.

Investment in renewables and alternative energy infrastructure across Asia is likely to gain further momentum as governments and corporates seek to reduce exposure to flashpoints such as Hormuz.

At the same time, elevated volatility is creating clearer differentiation across sectors.

Energy producers, commodity exporters and infrastructure linked to supply diversification stand to benefit from sustained higher prices. Balance-sheet strength and pricing power are becoming more valuable characteristics in equity markets, favouring companies able to pass through higher costs without significant demand destruction.

Capital is already beginning to rotate accordingly. Markets aren’t simply absorbing the shock; they’re reallocating around it.

Asia’s structural growth story has not disappeared. Urbanisation, rising middle classes and ongoing industrial expansion remain intact over the medium term.

The current environment introduces a layer of complexity and pressure, but it also forces faster adaptation in energy sourcing, supply chain resilience and capital allocation.

Stagflation risk is real and rising. It does not, however, remove opportunity. It reshapes where it sits and how it is captured.