How War in Iran Is Straining the U.S. Economy

Entering the fourth week of war between the United States and Iran, the economic consequences are no longer a hypothetical. They are showing up in supermarkets, on highways and across financial markets nationwide. 

The most immediate and apparent impact so far has been gasoline. As of Saturday, the national average price for gas has risen to $3.93 per gallon, up from just $2.98 on Feb. 26, just two days before the U.S. and Israel launched their initial strikes on Iran. According to economists at the Stanford Institute for Economic Policy Research, the sudden spike is expected to translate into a $740 annual increase in household fuel costs this year. The surge in prices is fueled by Iran’s blockage of the Strait of Hormuz, a narrow yet critical passage through Iran, responsible for transporting roughly 20% of the world’s oil. Iran’s response to being attacked has created what the International Energy Agency calls the “largest supply disruption in the history of the global oil market.”

The effects of this war extend far beyond those of gas prices. Higher oil prices have led to higher transportation costs, in turn raising the prices of food and consumer goods alike. Economists are now estimating that annual inflation will likely surge to 3.7% in April, up from 2.5% in February. This recent surge in inflation has already shifted financial policy expectations. Prior to the war, investors had anticipated that the Federal Reserve would cut interest rates at least once, if not twice, this year. Now, those predictions seem far-fetched as policymakers fight to grapple with rising prices. As a result of these issues, borrowing costs have also begun to climb. The average interest rate on a 30-year fixed mortgage has now climbed a full half-point from just under 6% to 6.53% since the conflict began.

Financial markets, which had initially shown some strength and pushback, have now begun to falter as the idea of a prolonged conflict becomes increasingly more likely. On Friday, major stock indexes posted their fourth consecutive weekly decline, making it the worst four-week stretch since April 2025. On that day, the Nasdaq also fell 2% and is down 6.8% for the year. The S&P 500 also dropped 1.5% and is down nearly 5% in 2026. The Dow Jones fell 443 points, bringing its loss this year to 5.2%. As fears of increasing inflation grow, markets have shifted from cautious optimism to defensive positioning in a matter of weeks.

Even gold, which was previously a safe haven throughout geopolitical turmoil, has faltered. Since the start of the war, gold prices have fallen by an astronomical 14%, dumbfounding investors who had expected it to benefit from both fears of inflation and global instability. Even as the U.S. dollar has fluctuated, gold has continued to decline across a multitude of currencies, such as the euro, pound and yen, unlike in the past. 

Much of what comes next will depend on the further severity and timeline of the conflict. If the war drags on and the Strait of Hormuz remains blocked, oil prices could climb even higher, further fueling inflation and a potential U.S. economic slowdown, or even a recession. In that scenario, consumers could face immense pressure from rising costs, while businesses struggle to hang on with shrinking margins and declining demand. 

On the other hand, a de-escalation in the war in Iran or a reopening of the Strait of Hormuz could potentially quickly stabilize global oil markets. Gas prices would likely return to previous costs and inflation could ease. 

Photo Caption: Economists estimate that annual inflation will likely rise to 3.7% in April, up from 2.5% in February.

Photo Credit: Wikimedia Commons