Told you so: The ceasefire is collapsing, and inflation is still climbing

Two weeks ago, we told you the ceasefire was fragile and that inflation would stay high even if it held. Both points still stand.

Since then, the situation has gotten worse. The US has struck Iran four times in the past week, hitting more than 300 targets. Iran hit back by striking six Gulf states at once — the widest single-day attack since the war started — then declared the Strait of Hormuz closed again. Trump responded by reinstating a naval blockade and proposing a 20% toll on cargo passing through it. Oil has reacted: Brent is trading near USD 85, up roughly 12% since last week.

Here is what has changed since we last wrote, and what it means for your money.

The ceasefire is breaking down, and that alone keeps inflation risk elevated.

The US Treasury cancelled Iran's sanctions waiver five weeks early, moving up the deadline to 17 July. Iran has hit US bases in Bahrain and Kuwait directly. Iran's negotiators have reportedly told Reuters, through sources who were not named, that control of the strait — not its nuclear programme — is now their main demand. If true, that would help explain why talks keep breaking down instead of moving toward a resolution.

You don't need to take our word for how serious this is. Prediction markets, where traders bet real money rather than just share opinions, currently give only a 39% chance that shipping through Hormuz returns to normal by December this year, according to Kalshi. That rises to just 46% by January. Those odds have fallen sharply since early July.

There's also less room for error than there was in February. US strategic reserves are at their lowest level since 1983, and global oil inventories have fallen by hundreds of millions of barrels since the war began. Reuters' own analysis this week put it plainly: the world no longer has the buffer to absorb another major shock the way it once did.

With that little room for error, you'd expect clarity on how the strait gets managed. Instead, Trump has proposed a 20% toll on all cargo passing through it — the same kind of fee the US once said only Iran collecting would be unacceptable. Even as this plays out, the two sides can't agree on basic facts: Iran says the strait is closed, while CENTCOM says flatly that 'traffic is flowing.' Both sides are once again describing two different realities.

None of this is settled, which is why oil hasn't calmed down — every day the strait's status stays contested, shippers and insurers keep pricing in the risk of a full shutdown. Oil near USD 85 is well below its wartime peak of USD 126, but still well above pre-war levels, and could climb further to USD 90-100 if things worsen. The risk of inflation staying higher for longer hasn't gone away.

Even if the escalation turns out to be short-lived, and oil falls, fuel prices don't follow.

Here's a number worth paying attention to: the US refining margin, measured against WTI crude — the difference between what a refinery pays for crude oil and what it earns selling petrol and diesel — just hit an all-time high of over USD 64 a barrel (Chart 1). European diesel margins hit their own record above USD 60 the same week.

Chart 1: Crude oil is cheap, but fuel isn’t.

Why does this matter more than the oil price itself? Because oil and the fuel you actually buy are priced in two different markets. Refiners are running at full capacity already. They simply cannot turn cheaper oil into cheaper fuel fast enough to close the gap. As Sparta Commodities' Neil Crosby put it this week, "there's just not enough refining capacity left globally to deal with all this."

Russia adds to the problem, for a separate reason entirely. Ukrainian drone strikes have knocked out up to half of Russia's refining capacity, and Moscow's diesel export ban has cut its diesel exports to less than a third of last year's level. None of this has anything to do with Hormuz — yet it's still pushing global fuel costs higher.

The International Energy Agency itself now describes this as a disconnect — oil supply looks fine, but the fuel market is dangerously tight. That gap is not a temporary blip. It is the reason your fuel bill can stay high even after the oil headlines calm down.

Don't assume falling oil prices mean falling inflation. Fuel costs, and everything that depends on them, are being driven by a shortage of refining capacity — not the price of oil itself.

Food prices were already rising before this latest escalation. New data shows why they will keep rising.

A comprehensive Reuters analysis this month puts hard numbers on the fertiliser disruption we have been tracking: the war cut more than 30% of the world's nitrogen fertiliser supply and nearly half of its exported sulfur. The reason is simple. Fertiliser production depends on natural gas, and the Gulf disruption cut off that gas supply at the source — not just the shipping routes.

Farmers have already paid those higher fertiliser prices during this planting season. When harvest comes, they will price their produce to cover those higher costs. Some farmers may have decided not to plant certain crops at all, because the economics simply didn't work out. Both outcomes point the same way: less supply, and higher prices.

The impact is visible country by country. India has been buying up urea at high prices, leaving less supply for everyone else. Australian farmers plan to grow less wheat next season, because at today's fertiliser costs, the economics don't work. Brazilian and African farmers face the same squeeze — pay more, or harvest less.

The US isn't immune either. A basket of grocery prices tracked by The Economist rose 12% over the past year — four times headline grocery inflation, and the fastest pace in a decade, driven by a shrunken US cattle herd, biofuel rules diverting corn away from food, and higher fertiliser and packaging costs. None of this resolves just because the war ends.

Weather adds another layer of risk. Japan's weather bureau puts the odds of El Niño persisting through autumn at 100%, and the US Climate Prediction Center gives an 81% chance of a "very strong" event — among the largest since 1950. India's monsoon is already running 40% below average, threatening cotton, soybean, and corn planting. As KPMG's Diane Swonk put it, we haven't yet seen the full impact of this war on food prices.

Food inflation runs on its own timeline — planting seasons and rainfall, not ceasefire talks. That timeline points to more pressure ahead, not less. And then there’s AI spending.

The Fed just confirmed, in writing to Congress, that AI spending is driving inflation — not just growth.

Memory chip prices have been climbing as AI data centres buy up enormous quantities of supply, competing directly with the memory chips that go into your laptop and phone. Apple and other manufacturers have little choice but to pass those costs on. This has nothing to do with oil or the war in the Middle East — it is happening because AI data centres are consuming memory chips faster than the industry can build new capacity to replace them.

We flagged this back in June, based on one Fed president changing his forecast. It is no longer just our view. Last week, the Fed's official Monetary Policy Report to Congress — under new chair Kevin Warsh — named three specific causes of elevated inflation: tariffs, war-related energy costs, and "the booming artificial intelligence buildout." That is the Federal Reserve, in an official government document, naming AI spending as an inflation risk alongside a shooting war.

CIBC Capital Markets has put a number on it. The bank estimates AI investment is adding around 0.4 percentage points to US inflation this year, through higher equipment and electricity costs plus the wealth effect of AI-driven spending. CIBC also estimates AI could account for nearly 30% of total US economic growth this year — which shows just how much of the current economy, and its inflation, now depends on one sector.

This shows up outside the US too. Japan's wholesale inflation hit 7.1% in June, the fastest pace since March 2023, driven by strong demand for AI-related raw materials. China's producer prices have now risen for four straight months on higher energy costs. Two separate forces, one from the Middle East and one from the AI data centre boom, are pushing in the same direction at the same time.

Don't assume inflation is under control just because oil headlines calm down. Memory chip prices are now a Fed-confirmed driver of inflation too.

What we recommend doing now

Our base case: interest rates are headed higher, not lower, and they will stay higher for longer than markets currently expect. Four separate inflation pressures are running at once, and none of them go away on their own. That is not a reason to sell everything or try to time the bottom. It is a reason to make sure your portfolio fits the world we just described, not the one many investors are still hoping for.

Reduce your exposure to interest rates. All four of the pressures we've described — the breaking ceasefire, fuel costs outpacing oil, rising food prices, and AI-driven inflation now confirmed by the Fed — point toward inflation staying higher for longer, and interest rates following it up. This is a difficult environment for anything that depends on cheap money — loss-making tech stocks, REITs, and high-multiple growth names in particular.

We favour technology companies with strong balance sheets and real profits over those still burning cash on future growth. Internet names fit that description: recent pullbacks have made valuations more reasonable, even as underlying earnings remain intact. The Invesco NASDAQ Internet ETF (NASDAQ: PNQI) offers diversified exposure. For fixed income, short-duration bonds remain our preference — they mature quickly, letting you reinvest at rates that are still rising.

Stay overweight Asia. We remain positive on the region because it offers stronger growth at lower valuations than other major markets. Asian equities trade at around 12.8 times forward earnings, against 21.9 times for the S&P 500 — a meaningful discount for comparable, or in some cases better, earnings growth. Within Asia, our highest-conviction ideas are Asian semiconductors, Singapore, and China.

The Global X Asia Semiconductor ETF (HKEX: 3119) gives you the full regional supply chain at a fraction of US valuations, backed by real earnings: Samsung's second-quarter operating profit jumped nearly 19-fold year-on-year. SK Hynix posted a record 72% operating margin in the first quarter, with second-quarter results still to come. Singapore is benefiting from three tailwinds at once: rising AI-driven growth, capital inflows from Gulf investors seeking a stable base outside the Middle East, and supportive government policy.

China also deserves a closer look, because it is really two separate trades. The first is value and earnings-recovery — an internet sector still working through a bear market, captured through the iShares Hang Seng Tech ETF (HKEX: 3067). The second is China's own AI boom: Chinese hyperscalers are spending heavily on AI infrastructure, and it's the domestic supply chain behind them that stands to benefit, increasingly supplying the global buildout too. The CSI All-Share IT ETF (SZSE: 159939) gives direct exposure.

Keep your regular savings plan running. Markets have swung between assuming the worst is over and assuming the worst is coming on this war — and been wrong both times. The same instinct to call the top or the bottom applies to the AI boom driving so much of today's growth. We don't know which way either one goes. That is a reason for discipline, not panic.

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Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds positions in iShares Hang Seng Tech ETF and Global X Asia Semiconductor ETF.