War’s Economic Toll Mounts
The conflict with Iran is emerging as a major drag on the U.S. economy, according to a Congressional Budget Office report released Tuesday. The nonpartisan agency found that the war accounts for more than one-third of the rise in inflation expected in 2026, with the impact intensifying over time.
In the second quarter of 2026 alone, the CBO attributes over 40% of inflation to the war. Looking ahead to the first quarter of 2027, the agency projects inflation will be half a percentage point higher than it would have been without the conflict. That persistent upward pressure is likely to push interest rates higher, making borrowing more expensive for households and businesses.
Mortgage Rates Climb
The housing market is already feeling the squeeze. Before the war began, the 30-year fixed mortgage rate was below 6%. As of Tuesday, it stood at 7.22%, according to Mortgage News Daily. The sharp increase reflects broader financial market concerns about inflation and the Federal Reserve’s expected response.
Wall Street widely anticipates the Fed will raise its key interest rate on Wednesday, a move aimed at containing inflation but one that could further elevate borrowing costs. The central bank faces a delicate balancing act as it tries to stabilize prices without derailing economic growth.
Energy Prices Surge
The primary driver of war-related inflation is a reduction in oil and natural gas shipments. Disruptions in the Strait of Hormuz and the Red Sea have constrained global energy supplies, sending prices soaring at the pump. Since the war started, gasoline prices have jumped 45% to $4.32 per gallon. Diesel, a critical fuel for trucks and heavy machinery, has climbed 66% to a record $6.26 per gallon.
These increases ripple through the economy, raising transportation and production costs that are eventually passed on to consumers. The CBO’s findings underscore how a distant conflict can quickly translate into financial pain for American families.
Pentagon Watchdog Flags Munitions Shortfall
The economic strain is compounded by military supply challenges. A Pentagon watchdog report released one day before the CBO’s analysis highlighted a shortfall in munitions and bottlenecks in the defense supply chain. According to the CBO, it would take five years to replace the munitions expended in the conflict.
As of August 1, the war had cost roughly $38 billion. That figure, however, excludes repairs to damaged U.S. base buildings in the Middle East. The CBO could not estimate those damage costs because the Pentagon did not cooperate with its requests for information, leaving a significant gap in the total financial .
Replacing missile defense interceptors alone would cost $13.1 billion, while replenishing all munitions expended through August 1 would run $21.7 billion. Maintaining the current pace of operations costs between $2 billion and $3 billion per month, and those expenses would climb if the conflict escalates.
Political Reactions
The report has sparked sharp reactions in Washington. White House spokeswoman Anna Kelly defended the administration’s actions, stating that President Trump acted to prevent Iran from harming the United States, its troops, and its allies. She also asserted that the U.S. military has sufficient munitions to meet its strategic goals.
Sen. Elizabeth Warren (D-Mass.) called for an end to the war, arguing that it is harming Americans’ finances and undermining military readiness. Her comments reflect growing concerns among lawmakers about the war’s mounting costs and its impact on the domestic economy.
What’s Next
The CBO’s report arrives at a precarious moment. With the Federal Reserve expected to raise rates, consumers already grappling with higher energy prices may soon face even steeper borrowing costs. The war’s fiscal burden, including the potential need to repair damaged bases—possibly with funding from host countries—remains uncertain.
As the conflict continues, its economic consequences are likely to deepen, challenging both policymakers and American households. The CBO’s analysis offers a sobering reminder that the costs of war extend far beyond the battlefield.
