The Congressional Budget Office specifically blamed the ongoing US war on Iran for more than 40% of inflation during the second quarter of 2026. As the West Asia conflict enters its seventh month, the budget watchdog’s new report released Tuesday (US time) offered no respite to Americans endlessly complaining about severely high oil and gas prices.
The latest official figures linked to the Iran war once again confirmed that inflation’s primary driver is the limited number of shipments crossing critical channels, such as the Strait of Hormuz and the Red Sea. Shipment traffic has been adversely affected since the US and Israel launched their joint military action against Tehran on February 28. In light of the rising uncertainty around a potential resolution between the US and Iran, polls show more Americans, including Republicans, blaming US President Donald Trump for the rising prices.
While Trump earlier accused big oil firms (Chevron, ExxonMobil, Shell and BP) of price “gouging,” and asserted that rate hikes are a small cost to pay to ensure Iran doesn’t have a nuclear weapon, the price tag associated with the Iran war has surged to $38 billion so far. The new Congressional Budget Office (CBO) further projected that the number will rise by $3 billion a month.
Latest figures project inflation will go up
CBO’s Tuesday report indicated that while the war has already significantly contributed to inflation’s rise this year, it will likely continue to surge in the first quarter of next year. The budget watchdog anticipates the seemingly endless war will add roughly 0.5% to inflation during that period.
As a result, interest rates are also expected to rise, despite Trump’s push to bring them down since before Kevin Warsh took over as the new Federal Reserve chair. According to Mortgage News Daily, the rate on the typical 30-year mortgage was under 6% before the war began in late February; it reached 7.22% on Tuesday. New rates are expected to be announced during Wednesday’s Fed meeting.
In a letter to US Congress, the office said that the concerning predictions were tied to the “inflationary pressures caused by the reduction in shipments of oil and natural gas through the Strait of Hormuz and disruptions to shipping through the Red Sea (which have intensified since CBO completed the analysis underlying this letter).”
“CBO estimates that the cost to replace the munitions expended through August 1, 2026, is $21.7 billion: $7.3 billion for the land-attack cruise missiles, $13.1 billion for the missile defense interceptors, and $1.2 billion for other munitions,” the letter stated. “Replacing those munitions has been the largest single component of the costs incurred by DoD during the conflict, CBO estimates.”
Back in March, the Paris-based Organisation for Economic Co-operation and Development had predicted a similar outcome in its economic outlook released at the time. Having projected US headline inflation to be 4.2% this year, up 1.2% from its previous project in December, it, however, expected new inflation pressures to dissipate by the end of 2027.
“The energy price surge and the unpredictable nature of the evolving conflict in the Middle East will raise costs and lower demand, offsetting the tailwinds from strong technology-related investment and production, lower effective tariff rates and the momentum carried over from 2025,” the research and policy group stated then.
The surge in Iran war costs
In its new report this week, the CBO couldn’t provide a full picture of each category of the war’s cost, despite lawmakers’ previous requests, due to limited data availability. Estimates provided by the budget office, a nonpartisan federal agency, largely rely on what the Pentagon has shared with Congress.
Its latest figures build on Defence Secretary Pete Hegseth’s testimony before the Senate Armed Services Committee, when he revealed that the war cost had reached $37.5 billion through July 21.
According to the report, the estimated cost to replace munitions used through August 1, 2026, is $21.7 billion, including $7.3 billion for the land-attack cruise missiles, $13.1 billion for the missile defense interceptors, and $1.2 billion for other munitions.
“Replacing those munitions has been the largest single component of the costs incurred by DoD during the conflict, CBO estimates,” the office added in its letter to Congress.
These estimations were disclosed a day after the Defence Department’s inspector general released its first report on the Iran war, claiming that the conflict had led to a shortfall of US munitions and “bottlenecks” in supply chains.
Defence Secretary Pete Hegseth and Trump have contradicted reports of the US running low on munitions.
The CBO report, meanwhile, projects that the Pentagon would need five years to replace munitions used during the war. These costs don’t include the price for repairs to damage incurred by “hundreds of buildings and structures at YS bases” in West Asia during the conflict.
Where do oil and gas prices stand now?
At the time of writing, the international benchmark Brent crude was priced over $107 a barrel. Just days ago, oil prices surged above $100 a barrel for the first time since July. They have jumped more than 20% this month due to the escalated fighting in the Persian Gulf.
Goldman Sachs has even warned that heightened tensions could push global oil prices beyond $120 a barrel, according to CNBC’s ‘Squawk Box Asia.’
Data from motor club AAA shows gas prices are at a national average of more than $4 per gallon. They have increased in the US by more than 40% since the conflict began in February, disrupting global oil supplies.