Fears of intensifying Middle East conflict and a sustained Strait of Hormuz shutdown sent oil prices to $120 per barrel on Thursday, the highest in four years, raising risks of oil-driven inflation and, in the worst-case scenario, stagflation. U.S. crude benchmark West Texas Intermediate (WTI) has risen approximately 10.29% over the past five days, extending its past three-month gain to 39.73%, according to OilPrice.com.

However, Brent crude retreated from a four-year high as escalating Middle East tensions competed with growing signs of the war’s economic toll, per Bloomberg, as quoted on Yahoo Finance. Prices had rallied earlier after Axios reported that Admiral Brad Cooper is set to brief Donald Trump on military options, pointing to a potential restart of hostilities.

Markets are finding it harder to ignore the growing economic fallout of the Iran war, as the ongoing Strait of Hormuz closure deepens what is now the largest energy supply disruption in history. This was reaffirmed by IEA head, Fatih Birol, as quoted on Reuters, the ongoing Iran conflict has triggered the most severe energy crisis in history.

Investors have grown increasingly anxious about the risk of inflation, as highlighted by the increase in inflation expectations. According to Joanne Hsu, director of the University of Michigan's Surveys of Consumers, in April, year-ahead inflation expectations jumped from 3.8% in March to 4.7%, marking the biggest monthly rise since April of last year. Meanwhile, long-term expectations climbed to 3.5% in April, the highest since October 2025.

Oil’s Upside May Outlast the Conflict

Brent crude, the global benchmark, has climbed about 7.81% over the five days and 40.87% over the past three months, as per OilPrice.com. Structural factors, including supply constraints and damage to regional energy infrastructure, are expected to play a larger role in supporting oil prices, potentially keeping them elevated even after the conflict concludes.

Even with a potential reopening of the Strait of Hormuz, oil prices are expected to remain elevated, with supply relief expected to be limited. Shipping activity may normalize gradually, but infrastructure damage across the Middle East continues to limit output (Read: Oil to Stay Elevated Above Pre-Conflict Levels: Energy ETFs to Benefit).

Stagflation: The Market’s Worst-Case Scenario

Jamie Dimon, CEO of JPMorgan Chase, cautioned that stagflation ranks among the worst-case economic outcomes, although he remains relatively unconcerned about near-term inflation, as quoted on a Reuters article.

Stagflation is an economic condition marked by the combination of slowing growth, rising inflation and high unemployment occurring simultaneously.

Per economists, as quoted on the abovementioned Reuters article, rising oil prices driven by the Middle East conflict could amplify inflation, lifting fuel, transport and production costs while increasing input prices for businesses and consumers alike.

ETF Strategies to Help Counter Inflation Pressure

Rising inflation headwinds are likely to weigh on investor finances, encouraging a more cautious, risk-aware approach and a reassessment of portfolios. For those with allocations skewed toward higher-risk assets or limited diversification, a gradual shift toward a more balanced risk profile may be prudent.

For investors, increasing exposure to defensive funds while maintaining a long-term investment horizon can be a prudent strategy in the current environment. Diversification, paired with a long-term outlook, remains key to navigating the uncertainty. Staying invested and looking past short-term volatility is the key to riding out such turbulent phases.

Below, we have highlighted a few ETF areas that investors may consider expanding their exposure to, as the risk of rising inflation increases.

Dividend ETFs

Dividend-paying securities serve as primary sources of reliable income for investors, particularly during periods of equity market volatility. These stocks offer dual advantage safety, in the form of payouts, and stability in the form of mature companies that are less volatile to large swings in stock prices. Companies offering dividends often act as a hedge against economic uncertainty.

Investors can consider Vanguard Dividend Appreciation ETF (VIG Quick QuoteVIG - Free Report) , Schwab US Dividend Equity ETF (SCHD Quick QuoteSCHD - Free Report) and Vanguard High Dividend Yield Index ETF (VYM Quick QuoteVYM - Free Report) , with dividend yields of 1.53%, 3.36% and 2.27%, respectively.

Consumer Staple ETFs

Increasing exposure to consumer staple funds can bring balance and stability to investors’ portfolios. Investors can put more money in consumer staples funds to safeguard themselves from potential market downturns.

Investors can consider Consumer Staples Select Sector SPDR Fund (XLP Quick QuoteXLP - Free Report) , Vanguard Consumer Staples ETF (VDC Quick QuoteVDC - Free Report) and iShares U.S. Consumer Staples ETF (IYK Quick QuoteIYK - Free Report) .

Value ETFs

Investors can leverage value investing, a strategy particularly compelling in today’s economic environment. Value investing through ETFs offers investors an easy and accessible way to follow this strategy. Value ETFs focus on stocks characterized by strong fundamentals and robust financial health, which trade below their intrinsic value.

Investors can consider Vanguard Value ETF (VTV Quick QuoteVTV - Free Report) , Dimensional US Large Cap Value ETF (DFLV Quick QuoteDFLV - Free Report) and Avantis U.S. Large Cap Value ETF (AVLV Quick QuoteAVLV - Free Report) .

Utility ETFs

As a low-beta sector, utilities are relatively shielded from market volatility, making them a defensive investment and a safe haven during economic turmoil. Investors often turn to utilities during downturns due to the steady demand for these companies' services.

Investors should gain from funds like Utilities Select Sector SPDR Fund (XLU Quick QuoteXLU - Free Report) and iShares U.S. Utilities ETF (IDU Quick QuoteIDU - Free Report) .