Ernst & Young just delivered a stunning verdict on the U.S. economy, and ballooning oil prices are a big reason why.
Crude oil is back above $100, stoking inflationary pressures at the wrong time.
Consumers feel squeezed and Fed is boxed in, and growth is looking a lot softer than many expected.
Oil’s ascent has been swift and impossible to ignore.
Brent is now trading at 40% above where it stood when the Iran war disrupted Hormuz traffic back in late February.
Since the beginning of 2026, the rise has been even steeper, with Brent rising by over 68% and WTI by over 82%.
In an interview with CNBC, EY Parthenon chief economist Gregory Daco argued that the current backdrop makes this year’s outlook less favorable, with the economy operating in a “multidimensional shock environment”.
Consequently, he revisited his estimates for economic growth and inflation, underscoring conditions resembling a stagflation situation, as echoed by other economists of late.
Wall Street’s latest GDP resets
The downgrades are still being measured at this point, but the direction is clearly lower, with banks and analysts trimming U.S. growth estimates on the back of higher oil prices and conflict-driven uncertainty.
- Morgan Stanley: The bank’s marking down U.S. consumption and GDP forecasts by a few tenths; Morgan Stanley now forecasts 2026 consumption growth at 1.7%, down from 2.1% in 2025.
- Current 2026 U.S. real GDP calls: Goldman Sachs 2.4%, Morgan Stanley 2.3%, Barclays 2.6%.
- Latest official U.S. GDP read: Q4 2025 growth was revised to 0.5% annualized, from 0.7%.
- Latest live Q1 tracker: Atlanta Fed GDPNow stood at 1.3% on April 9, 2026.
The numbers behind Daco’s economic warning
- Gregory Daco said EY Parthenon expects U.S. growth to remain sluggish and settle at around 1.5% by year-end.
- He said inflation might jump to 4% before wrapping up the year at around 3%.
- The mix for him was more stagflationary, though not outright stagflation.
- On the consumer end, he argued real disposable income growth is running at just 1%, while consumer spending is trending near 2.5%.
- The average tax refund is about $300 per household.
- The energy shock amounts to about a $350 hit per household (offsetting the tax refund boost).
- EY Parthenon’s baseline assumes Brent crude averages about $85 in Q3 and then slides to about $80 by year-end.
- In a worst-case oil scenario, Daco said inflation might surge to 4.5% to 5% with growth falling below 1%.
Slower growth and hotter inflation are a bad mix
Daco’s broader message is that the economy continues to get squeezed from multiple directions, describing the current backdrop as a “multidimensional shock environment.”
MoreEconomy:
- Goldman Sachs resets oil-price bets as war rages on
- How Fed meeting impacts mortgage rates, housing market
- IMF drops blunt warning on US economy
So it’s up against an onslaught from elements like tariffs, trade, AI-backed shifts, and now the Iran conflict.
That produces a rather uncomfortable mix of sluggish growth and stickier inflation.
However, Daco didn’t call it a full-blown stagflation situation at this point, but he argued it would feel “somewhat more stagflationary.”
That sharp take aligns with Bank of America analyst Savita Subramanian’s analysis, who also describes the current setup as a “classic stagflationary market environment,” due to weak consumer activity alongside strength in inflation-sensitive sectors like energy and industrials.
Moreover, that leaves the Fed in a precarious spot.
If inflation moves in the opposite direction, the central bank has virtually no room to ride to the rescue. Consequently, Daco feels policymakers will remain on hold “for the foreseeable future.”
In fact, Wharton professor Jeremy Siegel went a step further, arguing that we’re likely to see an interest rate hike as money supply, commodity prices, and the relentless increase in energy costs keep inflation elevated.
And if oil continues to move higher than expectations, the picture worsens further.
In that downside scenario, he argues that inflation might rise to 4.5% to 5%, while growth could drop below 1%.
Consumers are starting to run on fumes
On the consumer side, things have held up better than previously expected, but Daco argues that the foundation is getting shallower.
Though spending has looked decent on the surface, he argues that the latest numbers were “relatively healthy,” even if we adjust for inflationary pressures.
Nevertheless, he said, “Make no mistakes. Increasingly, we’re seeing consumers running on fumes.”
Daco pointed out the steep gap between disposable income growth and consumer spending.
That difference matters a ton because households are making up the difference in ways that just can’t last forever.
According to him, consumers are “dipping into their savings, using credit, and using wealth as a means to finance their outlays.”
On top of that, he also threw cold water on the notion that tax refunds offer a meaningful cushion.
He also threw cold water on the idea that tax refunds will provide a meaningful cushion. As mentioned in the data above, the so-called boost might already be gone before it shows up.
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