The intensifying conflict in the Middle East and the disruption of shipping through the Strait of Hormuz signal a pivotal moment for the global economy.

What seemed like a regional geopolitical issue has transformed into a systemic economic disturbance with a significant impact, especially on Western developed economies.

The Strait of Hormuz is a vital conduit for global energy trade. Before the conflict, about 38 percent of seaborne crude oil, 29 percent of liquefied petroleum gas, and nearly 20 percent of liquefied natural gas in the world traveled through this narrow strait.

Following the escalation, transit volumes have dropped sharply by around 97 percent, causing a severe supply disruption.

The impact on oil prices has been striking. Brent crude oil, which was trading around $65 per barrel at the beginning of the year, skyrocketed past $110 and briefly touched $120 during peak volatility. This sudden rise isn't normal and indicates a fundamental change in the energy landscape.

The implications for Western economies are significant. Unlike past demand-driven inflation episodes, this surge stems from supply constraints.

Energy, a fundamental input for all sectors, spreads price pressures across the entire economy. Transportation, manufacturing, agriculture, and household consumption are all directly impacted.

Central banks in advanced economies are now confronting a challenging policy dilemma. Before the crisis, market expectations were solidly set for monetary easing, driven by slowing growth and easing inflation.

But the sharp rise in energy prices has shifted these expectations. Inflation forecasts are now higher across key economies, prompting policymakers to reevaluate their positions.

Major central banks such as the United States Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan have kept interest rates unchanged.

The real importance, however, lies in the signals conveyed alongside these decisions. Policymakers have openly recognized increasing inflation risks connected to energy markets and have suggested they are prepared to tighten monetary policy if needed.

This change has significant implications. Rising interest rates raise borrowing costs for households and businesses, reducing investment and putting downward pressure on economic growth. When paired with high energy prices, this sets the stage for stagflation — a situation marked by slow growth and ongoing inflation.

Financial markets are already adjusting because government bond yields in many Western countries have surged, indicating altered expectations for future monetary policy.

For instance, in the UK, long-term borrowing costs have climbed to levels unseen since the global financial crisis. Mortgage markets are responding swiftly, with lenders reassessing risk and, in some cases, pulling their products from the market.

The likely effect on living standards will be substantial. Increased energy costs will directly burden household budgets, and rising interest rates will make mortgages, consumer loans, and business funding costlier.

Over time, these factors are expected to lead to decreased consumption, slower economic growth, and a softer labor market.

At the same time, the strategic calculations of major global players introduce additional complexity. For Iran, limiting transit through the Strait of Hormuz might provide economic benefits, such as higher export revenues driven by elevated oil prices, especially as restrictions on Iranian oil exports have been eased. However, ongoing supply disruptions also impose economic burdens on Western nations.

Other significant economies might also face uneven impacts.

Countries that export energy would gain from rising prices, boosting their fiscal health and external balances. Conversely, energy-importing nations — particularly in Europe and parts of Asia — would see their terms of trade worsen.

China holds a unique place in this changing environment. Being the world's largest energy importer, it faces direct exposure to price swings.

Nonetheless, China's varied supply sources, long-term energy agreements, and strategic reserves offer some resilience. Additionally, China's policy tools enable more coordinated actions across fiscal, monetary, and industrial sectors.

Furthermore, the current situation could speed up ongoing structural changes in global energy markets. There is likely to be a greater diversification of supply routes, more investment in alternative energy sources, and a strengthening of regional energy cooperation mechanisms.

The main takeaway from the Hormuz crisis is that energy security continues to be a vital foundation of economic stability. Western economies face considerable challenges due to geopolitics, reliance on energy supplies, and limited policy options.

The period characterized by low inflation, low interest rates, and stable energy prices might be ending.

The ongoing conflict is more than just a temporary disruption. It is a stress test for economic models based on the assumptions of abundant and predictable energy.

The result will depend not only on how long the crisis lasts but also on how well governments and institutions can adapt to a more volatile and unpredictable global landscape.

In this context, the Hormuz shock highlights how, in an interconnected world, regional conflicts can quickly escalate into global economic crises — and how the associated costs are seldom shared equally.

The author is a former prime minister of the Kyrgyz Republic.

The views don't necessarily reflect those of China Daily.

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