The Economics of Trump's War with Iran

The ultimate economic cost of Trump’s war with Iran and its aftermath is still uncertain. When asked that question in his mid-March press conference, Federal Reserve Board Chair Jerome Powell responded, “The economic effects could be bigger, they could be smaller. We just don’t know.”

But writing in mid-April, we do know that the costs have been devastating, and they will increase even if the temporary ceasefire holds. The cost has been greatest for the Iranian people, who are being collectively punished after already suffering at the hands of a murderous regime.

Let’s look more closely at the economic pain inflicted by the war and the damage done to the global and U.S. economies—and at how a few large companies and well-connected investors have managed to profit from the war.

“Dire Straits”

Iran has heavily disrupted oil tanker traffic through the Strait of Hormuz since the war began, constraining a route that normally carries about one-fifth of the world’s oil supply. Bloomberg News reports that in January and February 2026, on the eve of the war, global oil flows through the strait averaged 106.9 million barrels per day (bpd). Disruptions reduced shipments by 18.5 million bpd, or 17.2%. However, alternative measures—including diverting some oil away from the strait, releasing oil from international stockpiles, and removing sanctions on Iranian oil already at sea—kept the reduction in supply to 11.1 million bpd, or 10.3%. Even then, that net shortage is larger than the global shortages during the 1973 Arab Oil Embargo, the 1978–1979 Iranian Revolution, or the 1990–1991 Gulf War. In short, we’re in “dire straits,” as the International Energy Agency (IEA) concluded in its March report.

The significant disruption of traffic in the Strait of Hormuz has hit Asian countries especially hard. In the first three months of 2025, Asian countries bought 90% of the oil that passed through the strait. Shortages are already evident across Asia. For instance, restaurants in India are running short of gas cannisters, which now sell at two to three times their usual price. In South Korea and Japan, petrochemical producers have reduced their runs of ethylene gas, which is used in the manufacture of plastics. In China, a Shell-CNOOC (the China National Offshore Oil Corporation) joint venture has suspended its shipments of polyethylene plastic indefinitely. And with skyrocketing prices for jet fuel, several Asian airlines, including Air India and Cathay Pacific (based in Hong Kong), are demanding that customers pay fuel surcharges.

The price of crude oil on the West Texas Intermediate (WTI) market (a global pricing benchmark with a focus on North America) reached a high of $116.26 per barrel on April 7, an increase of 73.9% from February 27, the day before the war began. The price was back down to $92.10 per barrel on April 15. But even its largest price jump fell short of the doubling and near tripling of oil prices during the Arab Oil Embargo and the Iranian Revolution. That’s true despite the fact that the current global oil shortage is greater than in either of those oil crises. The explanation is that today’s economy is less dependent on oil than it was 50 years ago. As economist Paul Krugman points out, the U.S. economy is now four times larger than it was in 1973, but oil consumption is roughly unchanged.

Nonetheless, countries across the globe are facing crippling increases in the price of gasoline and diesel. The figure below shows the price hikes in the hardest-hit country on each continent, ranging from relatively modest increases in the United States—31% for gasoline and 41.8% for diesel—to much sharper increases for the Philippines, at 71.6% and 110.0%, respectively.

No country is exempt from rising crude oil prices in a global market, even the United States, a large oil exporter. For that reason, should the United States continue its blockade of Iranian oil leaving the strait, then not only will global oil prices increase, but so, too, will U.S. gasoline and diesel prices.

There are yet other punishing global shortages due to the war and the disruption of traffic through the Strait of Hormuz. Restrictions in the strait have cut off transport of about 20% of the global supply of liquefied natural gas. Hundreds of millions of people rely on liquefied natural gas—which is transported by tanker to distant shores where it is regasified—for power generation, residential heating, cooking, and industrial manufacturing. The closure of the strait has also suspended the movement of roughly 30% of the global supply of ammonia-based nitrogen fertilizer. The global supply of helium has been compromised as well. This byproduct of natural gas production is used to make semiconductors and medical imaging devices. Iran’s drone and missile strikes on a helium hub in Qatar halted production of roughly 30% of the global helium supply.

Jacking Up the Cost of Living

The damage to the U.S economy from the war with Iran is widespread. We should begin with how the war has driven up the cost of living, which was already higher than many households could afford.

Gas prices are above $4 a gallon for the first time since August 2022. On April 15, the average price of a gallon of gas was 37.9% higher than when the war began. (See Table 1.) It was also well above the $3.21 average when Trump took office in January 2025. Higher gas prices disproportionately hurt low-income households. In 2024, 3.4% of the spending of the poorest 20% of households went to buying gas, while that figure was only 2.3% for the richest 20% of households.

It’s a similar story for the price of diesel. On April 15, the price of a gallon of diesel was 49.2% more than its price before the start of the war. That was also considerably more than what consumers paid for diesel at the beginning of Trump’s second term. Higher diesel prices also increase the costs of the trucking industry, which in turn increases costs for food companies, and then food prices. Higher diesel prices also drive up the price of residential heating oil, which is interchangeable with diesel.

The war has pushed up other U.S. prices as well. For instance, 40% of U.S. electricity is generated by natural gas, according to Inside Climate News. With the supply of liquefied natural gas compromised by the war, many people are facing higher utility bills.

Also, about one-third of the global supply of urea, the world’s most widely used nitrogen-based fertilizer, comes from the Persian Gulf area and is derived from natural gas. With the war and the near-closure of the strait, urea is in short supply—and its price on April 15 was 54.7% higher than at the beginning of the war. And about a quarter of U.S. farmers have yet to secure their fertilizer supplies for the upcoming spring planting season, according to Agriculture Secretary Brooke Rollins. On top of that, higher diesel prices are driving up the cost of operating machinery and transporting crops for farmers.

The increase in jet fuel prices has surpassed most of the other price surges. Jet fuel prices are nearly double what they were at the beginning of the war. Fuel accounts for 40% of airlines’ operating expenses, according to Argus, the airline safety auditing company. And like airlines in Asia, U.S. airlines are also adding fuel-related fees onto the price of tickets.

Finally, the U.S Consumer Price Index (CPI) rose rapidly in March, increasing three times as quickly as it had in February. The inflation rate over the last 12 months reached 3.3%, a large jump from the 2.4% rate in the February CPI report. And in its Economic Outlook Report, the Organisation for Economic Co-operation and Development (OECD) increased its projected U.S. inflation rate in 2026 from 3.0% to 4.2%.

Troubles for Borrowers and Investors

In addition to higher prices since the war began, bond prices have fallen, driving up interest rates and borrowing costs.

Treasury bonds provide a good example of how this works. To borrow money, the federal government issues Treasury bonds, most often 10-year bonds. Bonds are a promissory note to pay back a fixed amount of money in the future, in this case in 10 years, and the interest rate is the yield of a bond, or what investors make from lending out their money by buying a bond.

The war made bonds less attractive in two ways. It increased economic uncertainty, and higher inflation rates reduced the purchasing power of the money the bond buyer gets paid when the bond matures (in 10 years in this case). The demand for government bonds decreased, the price of 10-year Treasury bonds fell, and the bonds’ yield (or interest rate) increased from 3.97% before the war to as high as 4.44% as it became cheaper to buy bonds. But those higher yields drove up the government’s cost of borrowing. Investors already holding bonds also took a hit, as the resale value of their bonds plummeted.

The same forces drove up the interest rates on home mortgages to above 6% for the first time since February 2022. The interest rate on a 30-year fixed-rate mortgage was 6.30% on April 16.

Stock markets also took a beating, especially in Asia. The MSCI (Morgan Stanley Capital International) index of stock prices in eight large Asian economies (including China, South Korea, India, and five others) dropped 14.4% in March. That was the biggest monthly loss since October 2008. Bloomberg News reported that in mid-April the MSCI Asia Pacific Index was still down 4% since the start of the war.

The sell-off in the U.S stock market was less severe. On March 30, the S&P 500 Stock Index was down 7.8%, hitting a six-month low. But not all stockholders took a hit in March. The average price of energy stocks in the S&P 500 was up 5.45% in March. At the same time, the average price of stocks in every other major sector of the economy on the S&P 500 fell. (See sidebar, “War Profiteering,” below.)

In April, stock prices rose with the announcement of a temporary ceasefire and the prospect of opening the strait to more oil tanker traffic. By April 15, the S&P 500 Index was 1.8% higher than it had been when the war began. But the jump in stock prices elicited warnings that investors are underestimating the economic damage from the Iran war, which IMF Managing Director Kristalina Georgieva called “already quite significant.” She added that “it will take some time for the recovery to kick in.”

The Stench of Stagflation

Finally, let’s look at how much Trump’s war of choice is likely to damage the U.S. macroeconomy.

The 50 economists surveyed by the Wall Street Journal in mid-March put the probability of a recession in the next 12 months at 32%. Another 47 economists surveyed by the Financial Times predicted that U.S. economic growth would slow by one-quarter to one-half of a percentage point if the price of crude oil remained at $100 a barrel. And in mid-March economist Paul Krugman, in his Substack blog, detected a “Whiff of Stagflation.” Still he cautioned that the underlying conditions in today’s economy are less prone to stagflation than those during the 1973 oil embargo, which tipped the U.S. economy into a recession and brought on double-digit inflation rates.

Seven weeks into the war, that whiff of stagflation has become a stench. Access to the Strait of Hormuz has been dramatically reduced, prices remain elevated, and uncertainty mounts as the actions of the Trump administration have become increasingly erratic. Even with the temporary ceasefire, the war and its aftermath still threaten to trigger a downturn in the U.S. economy or a period of prolonged stagnation with inflated prices.

To begin with, knocking a half of a percentage point off the projected U.S. economic growth is no small thing in an economy that grew just 0.5% in the last three months of 2025. In addition, Trump’s crackdown on immigration will reduce the U.S. economic growth rate in 2026 by as much as 0.32 of a percentage point, according to a recent Brookings Institution study.

Also, today’s labor market is far more dysfunctional than it was in 1973. Ever since Trump’s April 2025 announcement of his draconian tariffs, job-creation has stalled. The labor market added only 15,000 jobs a month in 2025. In 1973, the labor market added more than 250,000 jobs a month to a far smaller labor force.

On top of that, extreme inequality has contributed to the fragility of today’s economy. In 2024, close to half of the national income (46.8%) went to the top 10%, while just 13.4% went to the bottom 50%. That difference was two-and-a-half times larger than it was in 1973. And the richest 10% of households, the same group that holds the vast majority of stock, accounted for nearly half (49.2%) of consumer spending in the second quarter of 2025, according to Moody’s Analytics economist Mark Zandi. The increased volatility of stock prices puts not just the wealth of the richest 10% at risk but also the consumer spending necessary to sustain economic growth.

The likelihood of an economic downturn or a stagflation malaise will not disappear even if the current fragile ceasefire manages to open up the Strait of Hormuz. Speaking in mid-April at the Atlantic Council Energy Forum held in Washington, D.C., IEA Executive Director Fatih Birol warned that a recovery could take as long as two years. He added that, “Prices are already high, but they are not reflecting the severity of
the problem.”

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