The Iran War and inflation in Latin America

The Iran War and inflation in Latin America

José Carlos Díaz Silva[1], OBELA[2]

The closure of the Strait of Hormuz on 26 February 2026, following the US attack on Iran, led to a rise in hydrocarbon prices, which in turn increased global inflation. In April 2026, the IMF revised its inflation forecasts upwards. In the most favourable scenario, inflation is expected to reach4.4 per cent, compared with 4.1 per cent in 2025. Although on 14 June the Pakistani government (which is mediating between the US and Iran) announced the possible signing of a memorandum of understanding and a 60-day ceasefire, the effects on hydrocarbon prices will persist at least for the remainder of 2026. The price of a barrel of oil has fallen from $100 to $80, and is expected to remain at this level, which is 30 per cent above its pre-conflict level. The decline will be slow due to the destruction of refining infrastructure and the reduction in global strategic reserves. So far, in Latin America, the rise in petrol prices and inflation in general has been limited, uneven and lower than in the US, as governments have implemented fiscal policies to contain the increase.

The US has been one of the countries hardest hit by rising petrol prices and inflation. Between February and May 2026, the price of petrol rose from $0.77 to $1.18 per litre, an increase of 53.2% (see chart). Inflation began to accelerate from March onwards, reaching 3.3 per cent year-on-year in March, 3.8 per cent in April and 4.2 per cent in May – more than double the Fed’s inflation target (2 per cent) and 18 percentage points above its May 2025 level (2.4 per cent). In Latin America, the effects, up to 15 June 2026, have varied from country to country. As shown in Table 1, inflation in February and March was lower than in 2025 in Chile, Brazil and Argentina, whilst in Mexico and Colombia it rose. In April, the two countries with the highest inflation were Chile and Peru. These disparities stem from how each country has dealt with the closure of the Strait of Hormuz, which has generally involved subsidies and tax exemptions.

Firstly, there are the countries that took action from the outset of the crisis, such as Mexico and Brazil. Next, there are those that took measures belatedly, only once the effects on inflation had become evident, such as the US, Argentina and Peru. Finally, Colombia and Chile maintained active measures at the start of the crisis but withdrew them by the end of March. The response has depended on two variables: adherence to fiscal austerity, and the scope for increasing fiscal expenditure.

Mexico took two measures. Firstly, it introduced exemptions from the special tax on goods and services (IEPS), estimated at 900 million dollars. Secondly, it set a price cap on petrol with an octane rating below 90, fixed at $1.02 per litre. In May,Brazil announced subsidies for producers and importers of petrol and diesel, amounting to approximately $300 million per month, effectively reducing taxes on hydrocarbons to practically zero.

The US announced in May the suspension of the federal tax on hydrocarbons from 1June to 1 October, which is expected to provide a stimulus of approximately 8.4 million US dollars. These measures are being introduced a quarter late. Argentina merely postponed the tax increase in May, which explains the smaller increase compared with the previous three months. For its part, Peru announced, by decree, two measures on 28 May: the provision of diesel at 0.31 dollars per litre, purchased in the previous two months, and the provision of subsidies worth up to 9.94 MUSD.

Colombia maintained petrol subsidies in February and March, but abolished them from April onwards, which explains why prices first fell and then returned to the levels seen at the start of 2026. Chile also abolished subsidies, which by March had reached approximately 157 MUSD. As in Colombia, this explains the 38.6 per cent price increase in April.

Fiscal measures have succeeded in mitigating or delaying the effects of rising hydrocarbon prices when implemented and maintained. The ability of governments to sustain tax exemptions and subsidies will depend on the speed with which the memorandum of understanding between the US and Iran is signed and the Strait of Hormuz is fully reopened. In any case, the fiscal cost will rise and, if pressures on fiscal discipline in the region continue, there will be further fiscal cuts. Thus, the costs of the war will be inflation, reduced fiscal spending, low economic growth, and a lower standard of living for a population that never chose this conflict.