Aerial view of Marathon Oil Company’s Los Angeles Refinery on April 2, 2026 in Carson, California.
Justin Sullivan | Getty Images
The Iran war is beginning to affect the U.S. economy in both overt and less obvious ways, with rising energy costs leading the way and potential damage to broader growth smoldering beneath the surface.
Although fears of a recession have been heightened since the fighting began more than six weeks ago, most economists think the war will have a small impact on gross domestic product, perhaps shaving only a few tenths of a percentage point overall.
However, there are important caveats, mainly regarding the period. If the current ceasefire holds, the impact of inflation will fade. But a resumption of fighting would make the future even more uncertain, threatening the economy’s fragile growth of the past two quarters.
“It’s going to take away some of the growth, but we’ll get through it,” said Mike Scordeles, head of U.S. economics at Trust Advisory Services. “The bigger problem is uncertainty.”
Indeed, uncertainty has blanketed the U.S. economy for much of the past year since President Donald Trump announced “Emancipation Day” tariffs in early April 2025, followed by an increasingly forceful and aggressive foreign policy.
The increased pressures brought on by the war are raising many questions, including whether the wartime inflation spike is temporary, how much the situation affects consumers, who drive much of America’s economic growth, and how badly countries with less energy independence are suffering in the aftermath of the war.
The emphasis on all of that is how the Federal Reserve and other central banks will respond.
“Iran is important. Oil prices are important. Other things are more important. Revenues and other things continue to be low,” Skorderes said. “Another source of that uncertainty is that the Fed is delaying further rate cuts, and I think delaying rather than canceling, but pushing further rate cuts to later in the year, or even later in the year, which means the cost of borrowing for consumers is going up.”
suffering at the pump
The high interest rates come at a time when consumers are already hurt by soaring prices, which recently averaged $4.10 per gallon nationally, according to AAA. Rising mortgage interest rates also provided a tailwind, and existing home sales in March fell to their lowest level in nine months.
Still, debit and credit card spending rose 4.3% in March, the most in more than three years, according to Bank of America.
This was driven by a 16.5% jump in spending at gas stations. However, there was also “healthy growth” of 3.6% excluding gas, showing that wallets were still resilient enough to cope with the increase, the bank said.
One factor expected to help retain consumers is the expansion of tax refund checks that came with last year’s amendments to the One Big Beautiful Bill Act. The average tax refund this year is $3,521, an 11.1% increase compared to the same period in 2025, according to IRS data.
However, the increase in spending is not consistent with consumer sentiment surveys.
In fact, a widely followed University of Michigan study showed that after multiple wars, 1970s stagflation, September 11, 2001, terrorist attacks, the global financial crisis, and the COVID-19 pandemic, sentiment is at an all-time low dating back to the 1950s.
However, the link between declining sentiment and economic activity may be tenuous. Consumers often say one thing and do another.
“Weak consumer sentiment is not a reliable predictor of actual consumer behavior, and we expect real consumer spending to continue to grow, albeit modestly, by 0.8% through this year and 1.7% through 2027,” David Kelly, chief global strategist at JPMorgan Asset Management, said in a weekly market note.
Oil prices will be the key.
Joseph Brusuelas, RSM’s chief economist, drew the line at $125 a barrel for U.S. benchmark West Texas Intermediate crude as the point at which “economic problems become more severe.” Oil prices were trading around $91 on Wednesday morning, below the high of $115 that it briefly topped in early April.
“That’s where the demand destruction starts to accelerate and expand in scope. So it’s a little bit further down the line,” Brusuelas said. “We’re not ready to say we’ve experienced structural scarring in the Middle East. We’re not there yet because we don’t know the extent of the damage to physical production and refining capacity,” he said.
lower expectations
Economists predict that the ultimate effect of the war will be a slight slowdown in growth, but not a major collapse.
A few days ago, Goldman Sachs lowered its GDP forecast for this year to 2%, measured from the fourth quarter to the fourth quarter, down 0.5 percentage point from its previous forecast. The Atlanta Fed expects growth to be just 1.3% in the first quarter, better than the meager 0.5% growth in the fourth quarter but lower than previously expected of 3.2%.
The Wall Street investment bank also said that “slower activity growth will likely lead to weaker employment and higher unemployment,” projecting the unemployment rate by the end of the year to 4.6%, up just 0.3 percentage points from March levels.
Taken together, Goldman expects the Fed to cut rates multiple times this year.
“The Fed is in full wait-and-see mode for now due to the sharp rise in oil prices, increased uncertainty around the outlook, and strong (March) jobs data,” Goldman economists Jessica Linders and David Mericle said in a note. “With rising unemployment and limited progress in inflation, lower tariff effects are expected to outweigh energy pass-through inflows, necessitating two rate cuts in September and December.”
This is a more aggressive forecast than current market prices, which indicate no rate cuts until at least mid-2027. Fed officials decided to cut interest rates once in March.
The most obvious obstacle facing the Fed is inflation.
Until 2026, the central bank was expected to continue cutting interest rates to support the slowing labor market. Employment growth has remained largely unchanged over the past year and is negative when health-related jobs are excluded.
However, if inflation persists, it could upset the Fed’s policy and start a downward spiral throughout the year.
Global fallout
The impact of war is most directly visible in inflation data, but the news so far has been mixed.
As expected, headline inflation rose dramatically. The consumer price index for all items rose by 0.9% in March, bringing the annual inflation rate to 3.3%. But after removing food and energy, the monthly increase was just 0.2% and the annual core level was 2.6%, still above the Fed’s bogey of 2% but moving in the right direction.
Similarly, the producer price index, which measures increases at the wholesale level, accelerated by 0.5% on a headline basis, but only 0.1% on a core basis.
Interestingly, the New York Fed’s monthly consumer survey was much less volatile than the University of Michigan survey, with one-year inflation expectations coming in at 3.4% in March. This was an increase of 0.3 percentage points from the previous month, but was well below the University of Michigan survey’s forecast of 4.8%.
Dealing with inflation is not just a US issue. Indeed, the greater impact, particularly from petroleum components, is likely to be felt more in Europe and especially Asia, which rely heavily on Middle Eastern fuel sources to power their economies.
“We’re feeling a price shock because of energy, but it’s not really a supply shock,” said Scorderes, an economist at Trust. “Asia is being disrupted because it is a large user.”
The war has shaken up supply chains, and the impact is expected to become more pronounced in the coming months as raw material flows tighten and the pass-through from higher energy prices begins to take effect.
The Global Supply Chain Pressure Index released by the New York Fed in March was the highest since January 2023.
It is still unclear whether there will be any ripple effects in the United States, but the current view is that the impact will be limited.
“Although energy costs have increased over the past few years, they are still much cheaper than in past decades,” Scordeles said. “We’re going to suffer from it. It’s going to affect our growth, but it’s not game over.”
