CBO Report Links Iran Conflict to Soaring U.S. Inflation and Rising Borrowing Costs

POLICY WIRE — Washington, USA — The ongoing conflict with Iran is exerting significant upward pressure on American inflation and borrowing expenses, according to a fresh analysis published Tuesday by the Congressional Budget Office.

The CBO report attributes more than one-third of this year’s inflationary surge to the war. Projections indicate this trend will persist into the first quarter of next year, with the agency specifically citing the conflict as the cause for over 40% of inflation during the second quarter of 2026 and an additional half a percentage point increase in the first quarter of 2027.

These economic pressures are expected to push interest rates higher, making it more expensive for Americans to borrow money. Data from Mortgage News Daily shows the typical 30-year mortgage rate has climbed to 7.22% as of Tuesday, a sharp increase from the sub-6% levels recorded before the war began. Meanwhile, Wall Street anticipates the Federal Reserve will raise its key interest rate on Wednesday to combat these inflationary forces.

The primary catalyst for these price hikes is the disruption of oil and natural gas shipments through the Red Sea and the Strait of Hormuz. Since the start of the conflict, the average price of gasoline in the U.S. has jumped 45% to $4.32, while diesel—a critical fuel for commercial vehicles and farm equipment—has surged 66% to a record high of $6.26.

This assessment follows a report from the Pentagon’s watchdog released just one day prior, which identified supply chain bottlenecks and a significant shortfall in U.S. munitions. The CBO estimates that replacing the munitions used in the war, which cost approximately $38 billion as of Aug. 1, will take the Pentagon five years.

The $38 billion figure does not account for the damage Iran caused to hundreds of buildings and structures at U.S. military bases across the Middle East. The CBO noted that it could not calculate these repair costs because the Defense Department failed to provide information regarding the value of destroyed property or planned restoration efforts, and the Pentagon did not cooperate with the agency’s requests.

The CBO further estimated that replacing missile defense interceptors alone would cost $13.1 billion, with the total price tag to replenish all expended munitions reaching $21.7 billion. Maintaining the current level of conflict is expected to cost between $2 billion and $3 billion monthly, a figure that would rise should the war escalate.

Senator Elizabeth Warren, D-Mass., issued a statement calling for an end to the hostilities. She described the situation as a one-two punch that’s burning a hole in Americans’ pockets and burning a hole in our munitions supply, hurting our military readiness.

Reporting by Policy-Wire (PW)