The Iran War Could Be a $300 Billion Shock — Driving Up Mortgage Rates and Squeezing Wages

Eight in 10 Americans say gasoline prices are straining their household budgets, according to a new NPR/PBS News/​Marist Poll. The Iran war has pushed average pump prices up 55% since late February, and that’s just the most visible part of the war’s costs that households can see. The long-term fiscal costs are just as real, even if less apparent.

April’s U.S. inflation data has come in hot. According to the Bureau of Labor Statistics, the Consumer Price Index rose 3.8% on a year-over-year basis, the highest reading since May 2023 and well above the Federal Reserve’s 2% inflation target. Energy prices have played a central role in the higher inflation reading.

The most immediate economic fallout from the conflict has come through oil markets. In early February, front-month WTI crude oil futures were trading around $65 a barrel. As of May 12, crude is trading just over $100 a barrel, a roughly 54% increase since early February.

Higher crude prices are reflected at the gas pump. Average U.S. gasoline prices were around $2.80 per gallon just prior to the conflict and now top $4.50 per gallon. Oil and gas also feed into the cost of food production, manufacturing, freight, aviation and electricity. Anything that gets grown, moved or processed carries an energy input. When crude and gasoline jump by more than 50% in three months, those costs work their way through the entire consumer economy. That’s part of why energy shocks can push core inflation higher and stretch household budgets beyond just the cost of gas.

Higher energy prices are only the most immediate economic consequence of the conflict. The longer-term fiscal costs could prove even more consequential.

The Pentagon currently estimates the fiscal cost of the war so far at around $29 billion, mostly reflecting expended munitions. The true fiscal cost could end up being much higher.

In March, the Pentagon asked Congress for $200 billion in supplemental war spending. Factor in the borrowing costs associated with a new deficit-financed spending package and the cumulative fiscal cost of the war could easily sail past $300 billion. Separately, the administration has proposed a $1.5 trillion defense budget for fiscal year 2027, a roughly $440 billion increase year over year.

The Trump administration says some of this new defense spending is needed for munitions replacement. Since the war on Iran started, the U.S. has burned through roughly half of its THAAD and Patriot interceptor stockpile. These multimillion-dollar missiles are expensive and slow to produce. Replacing what’s been spent will take years, and the pressure to replenish the stockpile could grow if the administration chooses to extend the conflict.

These costs land on an already strained federal balance sheet. Federal debt held by the public has exceeded the nation’s entire annual economic output and is on track to exceed the World War II peak by the end of this decade. Net interest payments crossed $1 trillion last fiscal year and now exceed the base defense budget. The nonpartisan Congressional Budget Office projects $2 trillion deficits and rising, driven primarily by automatic entitlement spending on Social Security and Medicare. This outlook assumes neither a prolonged Middle East conflict nor the large defense spending increase the administration is proposing.

Higher deficit spending matters because of how it transmits to prices and interest rates. When debt grows faster than the economy, investors anticipate one of three outcomes: higher taxes, spending cuts or inflation that erodes the value of government debt. Inflation is the path of least political resistance, and the one Washington has historically taken.

The COVID-19 inflation episode is the most recent example. The pandemic, and the government’s response to it, disrupted supply chains and the labor market. Congress ran an unprecedented deficit-financed spending surge, paired with loose monetary policy from the Federal Reserve. Consumer demand surged past what the economy could supply, and prices and interest rates surged.

Persistent deficit spending isn’t the only way fiscal irresponsibility reaches family budgets. Treasury yields climb to absorb new federal borrowing, and those higher rates flow through to mortgages, business loans, auto loans and credit-card balances.

Weakening wage growth

Public debt also crowds out private investment once it tops roughly 80% of GDP, slowing the wage gains households depend on. Weaker wage growth combined with persistently higher prices squeezes real household income from both directions.

Both the Trump administration and Congress can take steps now to bring down energy costs and make Americans’ lives more affordable. Most immediately, the U.S. should work to speedily reopen the Strait of Hormuz, which of course would be immediately accomplished if the U.S. opted to de-escalate the Iran conflict.

Longer term, Congress needs to restore fiscal discipline and sound money. That means adopting statutory caps on spending, rejecting unwarranted spending surges, and reforming Social Security and Medicare, which drive nearly the entire long-term deficit.

The cumulative cost of the conflict depends entirely on its length and severity. The existing cease-fire could hold, energy prices could come down and Congress could reject a significant increase in defense spending.

Yet Washington’s track record on similar matters warrants caution. The post‑9/​11 wars in the Middle East, for example, produced a total fiscal burden in excess of $8 trillion, by some estimates.

If the war drags on and escalates, the fiscal and financial costs will grow too, with downstream effects on Americans’ budgets. Cost-conscious Americans, beware.