KEY TAKEAWAYS

  • Economists are revising their economic forecasts as the war in Iran continues to push up energy prices.

  • Forecasters now expect higher inflation and lower economic growth this year than they did before the war began.

  • Some economists are seeing an increased likelihood of a recession as a result of the war's disruption.

As the war against Iran enters its fourth week, the conflict is causing some economic setbacks.

Several economists downwardly revised their forecasts on Friday as the war dragged on. Forecasters penciled in higher inflation, slower economic growth, higher unemployment, and lower consumer spending in the U.S. and global economies in the months ahead than they expected before the war.

For example, inflation as measured by Personal Consumption Expenditures will likely surge to a 3.7% annual increase in April, up from 2.5% in February, Samuel Tombs, chief economist at Pantheon Macroeconomics, wrote. He also expected the unemployment rate to peak at 4.7% this year, up from 4.3% in January.

The new forecasts aim to estimate the damage caused by the war. Fighting has closed the crucial Strait of Hormuz, choking off 20% of the world's oil supply, and destroyed oil and gas facilities in the region, sending energy prices soaring. The crisis is "the largest supply disruption in the history of the global oil market," the Energy Information Association said Friday.1

Rising gas prices are causing a ripple effect across the U.S. economy that's likely to worsen the longer the Strait of Hormuz remains closed.

"The near-term outlook for the US economy has worsened following the conflict in Iran," Tombs wrote. "The current level of oil prices suggests that gasoline prices will jump to about $4.20. ...Meanwhile, financial conditions have tightened, the 'wealth effect' supporting high-income households’ spending has withered, and consumers’ confidence has tumbled."

WHAT THIS MEANS FOR THE ECONOMY

The Iran war is a significant setback for an economy that just a few years ago was poised for a "soft landing" from the post-pandemic surge of inflation.

In the U.S., the most serious economic consequences of the conflict stem from the skyrocketing price of oil. Brent crude, the international benchmark, hovered around $110 a barrel on Friday, up from $67 last month before the bombing began in late February.

Gasoline prices have risen nearly a dollar a gallon since then, and diesel is up even more, pushing up transportation costs and causing a domino effect on other prices. Forecasters at Oxford Economics don't expect oil prices to return to their pre-war trajectory until 2028.

Higher gasoline prices have hit household budgets, especially for people with lower incomes, who tend to spend a larger share of their income on fuel. Economists estimate that higher gas prices have wiped out any income gains from tax cuts included in the One Big Beautiful Bill, President Donald Trump's tax and spending law that is boosting tax returns this year.

"The extra refunds are equivalent to two-thirds of the extra money households likely will be spending on gasoline, though low-income households will be substantially worse off on net," Tombs wrote.

Related Education

Crude Oil: Definition, Importance for Investors, and Market Impact
Crude Oil
Gross Domestic Product (GDP) Formula and How to Use It
Gross Domestic Product (GDP) Definition

Last week, Goldman Sachs forecasters similarly scaled back their economic growth expectations and raised their inflation forecast. They now anticipate the economy will grow an inflation-adjusted 2.2% in 2026, down 0.3 percentage points from their previous forecast. They expect sharply higher inflation, with the PCE price index rising 2.9% over the year in December instead of the 2.1% they had previously projected.

The energy shock has some economists seriously considering the possibility of a recession. Mark Zandi, chief economist at Moody's Analytics, put the probability of a recession this year at 49%, based on the investment bank's AI-powered model.2

The renewed threat of a recession is a sharp turnaround for an economy that had proven resilient through the energy shock spurred by the war in Ukraine in 2022, the post-pandemic surge of inflation, and President Donald Trump's tariffs in 2025.

Before the war, inflation had subsided from its 2022 peak but was above the Federal Reserve's target of a 2% annual rate by all major measures. Forecasters had mainly been expecting healthy economic growth despite a dismal job market. Not anymore.

"Recession is once again a serious threat," Zandi posted on social media platform X. "Almost all the economic data have turned soft since the end of last year."

Do you have a news tip for Investopedia reporters? Please email us at