The war with Iran brings inflation and borrowing costs for Americans. A new report released on Tuesday by the Congressional Budget Office (CBO) indicates that this war is responsible for more than one-third of the inflation increase this year, and this trend is expected to continue into the first quarter of next year.
Impact of War on Interest Rates and Inflation
The CBO report specifically attributes the war to over 40 percent of the inflation increase in the second quarter of 2026 and estimates that this war will cause an additional half percent increase in inflation in the first quarter of 2027. Following this increase, interest rates will also rise, affecting borrowing costs.
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The 30-year mortgage rate, which was less than 6 percent before the war, has reached 7.22 percent on Tuesday. The stock market also expects the Federal Reserve to raise its key interest rate on Wednesday to control inflation.
Rising Fuel Prices and Economic Consequences
The CBO report states that the shortage of oil and natural gas transportation through the Strait of Hormuz and the Red Sea is the main factor behind the inflation increase. The average gasoline price in the United States has risen by 45 percent since the start of the war, reaching $4.32 on Tuesday. The price of diesel, which is vital for the economy, has also increased by 66 percent, reaching a record $6.26.
This report follows recent findings from the Pentagon's watchdog, which indicate that the war with Iran has led to ammunition shortages and "bottlenecks" in supply chains. The CBO estimates that it may take the Pentagon five years to replace the ammunition used in this war, with costs estimated at nearly $38 billion by August 1.
The estimated cost to replace only the defensive missiles will be $13.1 billion, and the total cost to replace the consumed ammunition is estimated to be $21.7 billion by August 1. Maintaining the current state of the war requires about $2 to $3 billion per month, and this amount may increase if the conflict escalates.
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