War, tariffs and the return of inflation pressure, says Richard Portes

Crude prices lurched higher and lower through CNBC’s Squawk Box Europe on Wednesday morning as anchors Karen Tso, Steve Sedgwick and Ben Boulos tracked another volatile chapter in the Middle East crisis.

Kuwait activated air defences against reported missile and drone threats. The United States launched fresh strikes on Iranian military targets. Diplomatic hopes flickered after US Secretary of State Marco Rubio insisted Washington still preferred “the negotiated diplomatic route”, even as markets recalibrated for a longer conflict and higher energy costs.

Against that backdrop of geopolitical tension, sticky inflation and nervous central banks, Richard Portes, Professor of Economics at London Business School, warned that policymakers are being forced into increasingly difficult decisions.

“There are some fragilities,” Portes said, “and the new incoming chair of the Fed is going to have to be aware of that.”

The discussion followed interviews with Federal Reserve officials Neel Kashkari and Austan Goolsbee, both of whom warned that inflationary pressures from energy markets were proving more persistent than expected. Goolsbee described the Iran conflict as creating a “stagflationary shock” for energy importing economies, particularly across Asia.

Portes agreed that inflationary pressures were becoming harder for central banks to contain.

“As long as this war goes on, the pressures on supply are very substantial,” he said. “Central banks are in a very difficult position.”

The interview centred on whether higher interest rates and geopolitical instability were beginning to expose hidden weaknesses in the global financial system, echoing concerns from before the 2008 financial crisis.

Portes acknowledged similarities with 2007, particularly around the rapid expansion of private credit markets, but argued the comparison should not be overstated.

“The private credit sector, for example, you could make some analogies with mortgage-backed securities,” he said. “But private credit is not as big as the MBS were, and the underlying security is better.”

Most importantly, he argued, banks themselves are far stronger than they were before the global financial crisis.

“The banks are much better capitalised,” he said. “If you look back at the 2020 Covid shock, the banks were fine. The markets were not so fine.”

That distinction matters. Portes suggested the greater risks now lie in markets and macroeconomic pressures rather than in the core banking system itself. He pointed to vulnerabilities in private credit, stretched investment around artificial intelligence and the broader inflationary consequences of prolonged conflict.

“What we’re seeing in the Middle East, as we roll on from one week to the next, with this duration that’s causing more inflation risk, it does cause more problems,” he said.

For central bankers, the challenge is acute. Political pressure in the United States continues to build for lower interest rates, while tariffs, supply chain disruption and energy prices are pushing inflation higher.

Portes said the economic logic now points in the opposite direction.

“The pressure will be to raise rates rather than lower,” he said. “The political pressures, of course, are something else, but the economic pressures are quite clear.”

He also suggested the Federal Open Market Committee may become more openly divided in the coming months as policymakers wrestle with conflicting signals from inflation, growth and geopolitics. But he cautioned against overstating the significance of dissent within the Fed itself.

“Paul Volcker lost the vote at one point in the late 80s, and the world didn’t fall apart,” he noted.

Throughout the interview, Portes returned repeatedly to the role of expectations — not only market expectations, but consumer psychology and political rhetoric.

Consumer sentiment in the United States has fallen sharply, yet spending has remained relatively resilient. Portes argued that inflation risks become more dangerous when public anxiety begins to shape behaviour.

“We economists are quite conscious of the way in which loose talk can affect expectations,” he said, “and through expectations can affect consumer behaviour.”

That, ultimately, may be the deeper risk facing policymakers: not simply war, tariffs or oil prices in isolation, but the cumulative effect of overlapping shocks on confidence, expectations and the fragile balance central banks are trying to maintain.

The full interview can be viewed here: Squawk Box Europe, 28 May 2026 (12:43 - 21:35)