Investing.com -- Oil prices have surged since the Israel-Iran conflict erupted, stoking fears that another inflation spike could be in the cards. But Morgan Stanley is pouring cold water on the idea that higher crude will drive a major inflation shock, arguing the impact on core prices will be “minor” and short-lived.

“We don’t expect an important push to core inflation from oil prices,” Morgan Stanley’s economists said in a Friday note, noting that Federal Reserve Chair Powell’s view that oil shocks don’t have lasting effects on inflation “is in line with a quantitative analysis we published in September 2023, after another supply-driven increase in oil prices due to production cuts in Saudi Arabia.”

Morgan Stanley’s model shows that a 10% supply-driven jump in oil prices adds just 3 basis points to core inflation over three months—barely a blip. The bulk of the impact, they say, shows up in headline inflation, with their estimates suggesting a 35 basis point increase in headline CPI, mostly reflecting the energy component. “Aligned with our conclusions at the time, we did not see acceleration in core inflation after the oil shock, and we expect a similar outcome this time,” the bank said.

The economists stressed that the current oil rally is a classic supply shock, not a sign of booming global demand. That distinction matters because demand-driven oil spikes tend to have a much bigger and more persistent effect on core inflation, while supply shocks like this one tend to fade quickly. If oil prices retrace in the coming weeks, Morgan Stanley expects any inflationary impact to be even smaller.

While the Fed and Morgan Stanley both expect some pickup in inflation this summer—largely from tariffs rather than oil—the bank is sticking with its view that the upswing will be contained. “The lack of an important inflationary push over the summer will certainly make the Fed (and us) reassess its outlook for the rest of year,” the economists added.

Despite the market’s jitters, Morgan Stanley doesn’t see oil as a game-changer for U.S. inflation. For now, the bank is betting that the inflation story will be driven by tariffs and other factors—not the latest spike in crude.