President Donald Trump had the economic wind at his back early in the year: falling mortgage rates, relatively low inflation and cheap oil and gas.
Its war with Iran threatens to undermine all that.
The Middle East conflict could inflict deep and far-reaching economic pain on Americans, especially if the war persists. It’s a terrifying thought for the millions of people struggling with the high cost of living, and it could present a significant political burden for Trump and Republicans in this year’s midterm elections.
Nobody knows how long this war will last. If the United States ends its conflict sooner rather than later, last week’s rising oil and gas prices could quickly reverse, and we could look back on this period as a blip.
But Trump said Friday that the United States would not end the war until Iran surrenders unconditionally. And tankers are not eager to resume shipping in the region as long as Iran threatens to set ships on fire.
Energy prices are rising at a precarious time: Friday’s worse-than-expected jobs report renewed fears that a prolonged labor market shutdown could lead to widespread job losses if uncertainty about the economy grows further.
And if inflation accelerates, the U.S. economy could face a toxic combination of rising prices. and rising unemployment, which would be difficult for the Federal Reserve to resolve.
That could entrench the number one issue (and biggest complaint) in voters’ minds: the economy’s lack of affordability.
Americans are fed up with the high cost of living, but one saving grace has been that gas prices have remained relatively low.
Trump told Reuters on Thursday that he was not worried about rising gasoline prices, which rose 34 cents a gallon over the past week to the highest price of any of his presidential terms: “If they go up, they go up,” he said.
But gas prices are one of the best-known and most publicized costs: They are seen all over the city in gigantic quantities at gas stations, and drivers fill up the tank about once a week, on average. Higher gas prices could have a huge effect on Americans’ perceptions of their finances.
Low gas prices have helped keep inflation in check over the past year. If gas prices continue to rise, overall inflation could accelerate.
“It’s one thing if you go from $3 to $3.25” per gallon of gasoline, said Mark Zandi, chief economist at Moody’s Analytics. “But if you go from $3 to $4, that completely undermines trust.”
“Americans are on high alert when it comes to anything related to the cost of living,” he added.
Consumer prices rose just 2.4% in January from a year earlier, an eight-month low. And with price increases due to tariffs expected to occur this year, economists anticipated that inflation as a whole would decline in 2026.
But dramatically higher fuel prices could change that. Higher jet fuel prices could drive up airfares. Rising transportation costs could affect grocery prices the same. And if high prices persist for months, petroleum products such as plastics could become more expensive and spread throughout the economy for a long time.
That’s why inflation could return to 3% this year if the war drags on and oil prices continue to rise, Goldman Sachs economists told clients this week. Goldman had predicted that inflation would decline to 2% by the end of the year.
Higher prices could hurt consumer spending, which accounts for more than two-thirds of the U.S. economy. Even before the war, growth already slowed in the fourth quarter and retail sales fell in January by the most since May 2025.
“The impact on inflation becomes even greater the higher prices rise; and the damage to the real economy – to growth – will also be magnified,” Zandi said. “There are no advantages. There are only disadvantages for the American economy.”
Home buyers breathed a sigh of relief in the last week of February: Mortgage rates fell below 6% for the first time since 2022, which could help millions of would-be homeowners waiting on the sidelines for an affordable place to live.
Mortgage rates had fallen steadily over the past nine months.
with a big help from the Federal Reserve’s three interest rate cuts last year.
But investors are now demanding higher yields on Treasury bonds for fear of economic damage from the war. Mortgage rates, which are closely tied to the benchmark 10-year U.S. Treasury yield, also rose last week, back above 6%.
The ability to achieve the American dream is crucial to people’s perception of affordability. The United States seemed to be on the verge of a breakthrough. A prolonged war with Iran could freeze the real estate market again.
The key question – although unknowable – remains: how long will this war last?
The conflict has effectively stopped the flow of Middle Eastern oil through the critical Strait of Hormuz, and oil producers have been left without places to store their crude. This caused a drop in oil production, causing prices to rise even further.
Each sustained increase of $10 per barrel could cost the average American household about an additional $450 each year, according to Zandi.
The key part is “sustained.” The Trump administration insists it has a plan in place to free up oil flows in the Strait soon, and expects oil and gas prices to fall again. The market remains skeptical: US oil surpassed $100 a barrel on Sunday for the first time since July 2022.
“So it could be that in a couple of weeks we won’t be talking about this anymore: that oil prices have fallen again, that volatility has decreased and that this is just a bad memory,” said Gregory Daco, chief economist at EY-Parthenon. “It could also be the case that in a few months we will still be here, with oil prices trading above $100 a barrel and yields being noticeably higher and inflation significantly higher.”
If that happens, he added, “we will talk about job cuts and possible recession conditions.”