Iran war likely to drive up inflation next year, CBO says

The U.S. war against Iran is likely to drive up inflation early next year and could cost at least $2 billion a month as long as it continues, according to a new report from the nonpartisan Congressional Budget Office (CBO).

The CBO estimated in its Tuesday report that the main economic impact of the conflict is made of pressures caused by the disruptions to shipping through the Red Sea and the reduction of natural gas and oil shipments through the Strait of Hormuz.

The reduction in shipments has increased energy prices and because of it, in the first quarter of 2027, inflation is estimated to be 0.5 percentage points higher than what CBO projected in February this year.

“The agency estimates that the higher rates of inflation attributable to the conflict will boost interest rates on Treasury securities. In CBO’s assessment, interest rates on 3-month Treasury bills are nearly 0.2 percentage points higher in 2026 than the agency estimated this past February,” CBO said in the 19-page report. “By the first half of 2027, such rates are less than 0.1 percentage point higher than previously estimated.”

The war against Iran has cost the Pentagon around $38 billion as of Aug. 1 this year, CBO estimated when factoring in replacing expended munitions, flying hours, assets lost in the conflict and increased fuel costs.

The Pentagon told Congress on Aug. 13 that the cost of war has gone up to over $42 billion, The Hill reported on Tuesday.

Defense Secretary Pete Hegseth told the Senate during a hearing in July that the estimated cost of the conflict was $37.5 billion.

“Trump’s illegal war with Iran is a one-two punch that’s burning a hole in Americans’ pockets and burning a hole in our munitions supply, hurting our military readiness,” Sen. Elizabeth Warren (D-Mass.), who sits on the Senate Armed Services Committee, said in a statement. “This war is a betrayal of the American people, and it needs to end.”

The main cost for the Pentagon would be the “large expenditure” of missile defense interceptors, leaving the U.S. with a reduced inventory for “several years,” according to CBO.

The CBO report came a day after a report from the Pentagon’s watchdog said that U.S. diplomatic facilities in four Gulf countries – Iraq, Kuwait, Saudi Arabia and the United Arab Emirates (UAE) – suffered around $184 million in estimated damages from Iranian military strikes.

The watchdog said that the U.S. conflict with Iran “has resulted in strategic inventory shortfalls and revealed industrial base bottlenecks for munitions resupply” regarding advanced weapons systems.

President Trump and Hegseth have repeatedly said that the U.S. has sufficient weapons stockpiles.

“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,” CBO said in the report.