Dive Brief:
- The surge in energy prices spurred by the U.S.-Iran war will push up the annual inflation rate by 0.6 percentage point by the first quarter of 2027, the Congressional Budget Office said in a report to House lawmakers as the Federal Reserve struggles to curb inflation to its 2% target.
- The forecast by the non-partisan CBO, based on information through mid-August, assumes that the per-barrel price of Brent crude oil will fall to $84 by the end of 2026 from $104.65 on Thursday, a 24% decline.
- “Petroleum is a component of the bundle of goods and services that all Americans purchase,” the CBO said. “Because the price of almost every product reflects shipping costs, increases in petroleum prices — a significant input in transporting goods — indirectly affect the prices of most goods and services.”
Dive Insight:
Fed Chair Kevin Warsh on Wednesday said policymakers unanimously approved a quarter-point increase in the federal funds rate mindful of a stubborn trend of inflation, strong U.S. economic growth and increased geopolitical risks.
“We reckon that the re-escalation of the war in the Middle East and the resulting prospect of more inflationary pressures from higher-for-longer oil prices was the deciding factor” prompting policymakers to raise main rate for the first time in three years, Yardeni Research President Ed Yardeni said Thursday in a note.
President Donald Trump — who for weeks has called on Warsh to trim the benchmark rate — lashed out at the Federal Open Market Committee for its decision.
“The board is very hostile. They’re very political. They’re doing the wrong thing. They’re a bunch of politicians. They are people put on by politicians,” Trump said to reporters on Wednesday.
Launched by the U.S. and Israel in early February, the war with Iran has caused widespread disruption across global energy markets.
Oil inventories have blunted the impact of the conflict somewhat but are rapidly falling, the International Energy Agency said in a Sept. 11 report.
“With buffers shrinking and the global refining system stretched to the limit, the need for progress in resolving the conflict in the Middle East — and the Russia-Ukraine war, which is now in its fifth year — is greater than ever to avoid further market tightening and demand destruction,” the IEA said.
The price for a barrel of Brent crude oil during Q4 2025 was $64, according to the CBO, or 63% cheaper than today.
During the past year, the price of a gallon of gasoline has surged from $3.20 to $4.44, a 39% increase, according to AAA.
Price pressures induced by the war with Iran will also push up yields on Treasury securities, the CBO said. Interest rates on Treasury bills are nearly 0.2 percentage points higher this year than the CBO estimated in February.
“Long-term interest rates, which reflect the anticipated path of short-term rates and other factors, are expected to be somewhat higher as well,” the CBO said.
In the past several days the yield on the 10-year Treasury note, the benchmark for business and household borrowing, has breached 5% for the first time in 19 years.
