The U.S.-Iran War and Its Toll on the American Economy

The three core sections — Situation Report, Economic Impact, and Outlook — preserve all the essential facts: the origin and current state of the conflict, the Strait of Hormuz closure and its ripple effects on oil, inflation, the Fed, and markets, and the key risks and uncertainties ahead.

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Special Report and Analysis: The U.S.-Iran War and Its Toll on the American Economy

Daoud Al-Jaber - U.S./Middle East Affairs Analysis
Tell Us Worldwide News Network

WASHINGTON - On February 28, 2026, the United States and Israel launched Operation Epic Fury — a sweeping joint military campaign against Iran and the most significant open conflict in the Middle East in decades. Nearly 900 airstrikes in the first 12 hours targeted Iranian missile stockpiles, air defenses, and military command infrastructure, culminating in the assassination of Supreme Leader Ali Khamenei. His son, Mojtaba Khamenei, has since been named his successor — a development President Trump called troubling.

Now on day twelve, the war has no clear end. Defense Secretary Hegseth declared the campaign is entering its most intensive phase yet, while Trump described the war as very complete, pretty much, then separately told Republican lawmakers the U.S. had not yet won enough. Iran's Revolutionary Guard was unambiguous: Tehran, not Washington, will decide when the fighting stops.

The human cost is severe. More than 1,300 Iranian civilians have been killed, along with at least 570 in Lebanon where Israeli strikes have targeted Hezbollah. Seven U.S. service members have been killed. Iran has retaliated with over 500 ballistic missiles and nearly 2,000 drones directed at Gulf states and U.S. targets, and has begun mining the Strait of Hormuz.

ECONOMIC IMPACT
The Strait of Hormuz — through which roughly one-fifth of the world's daily oil supply flows — has been effectively closed since the war began, triggering the largest supply disruption in recorded history. Brent crude surged from $67 per barrel to nearly $120 before retreating to roughly $90 as of Wednesday. National gasoline prices jumped 51 cents per gallon in the first week, reaching $3.41. Analysts project $4-plus at the pump within days, with diesel potentially exceeding $5 if the strait remains shut.

The energy shock has reignited stagflation fears. January's consumer price index had reached 2.4 percent — near the Fed's target — but that progress is now at risk. Unlike tariffs, oil spikes feed into consumer costs almost instantly, affecting gasoline, shipping, airline tickets, and manufactured goods. Ten-year Treasury yields have climbed to 4.173 percent, squeezing mortgage rates and household borrowing. The Federal Reserve faces a stark choice: raise rates to fight inflation and risk recession, or hold rates and allow inflation to entrench.
Markets have responded with alarm. The Dow fell more than 400 points in the opening days, Japan's Nikkei dropped 7 percent, and recession odds on prediction markets jumped from 24 to 38 percent. Defense spending could approach Trump's $1.5 trillion budget request — a 50 percent increase over current levels — further pressuring the federal deficit. A Quinnipiac poll found 53 percent of voters, including 60 percent of independents, oppose the military action, presenting a significant political liability ahead of November's midterms.

OUTLOOK
There are partial offsets. As a net energy exporter, the U.S. stands to gain from elevated oil prices domestically, and the defense and aerospace sectors are positioned for strong growth. Some economists argue the global economy has absorbed large shocks before. But recovery depends on how long the strait stays closed. Qatar has declared force majeure on gas exports, Saudi Aramco's Ras Tanura terminal has shut down, and the Qatari energy minister has warned oil could reach $150 per barrel if regional shipping does not resume soon. Fertilizer disruptions now threaten food prices with the spring planting season approaching. The question facing the Fed, Wall Street, and American households is the same one confronting Washington: how long, and at what cost?