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14 May 2026 / Article
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Copy LinkThe war in the Middle East unleashed an oil-driven inflationary shock that is now spreading through the U.S. economy, eroding purchasing power and compressing growth. As the conflict drags on with no easy exit and rising risks of a prolonged stalemate pertaining to reopening the Strait of Hormuz, the Fed will likely remain on an extended pause navigating risks of a potential tradeoff between containing inflation and supporting the labor market. Before the start of the war, consumers were already under pressure as 2025 tariffs continued to pass into retail prices and wage growth continued to normalize from the Covid-19-era spike. An additional tax in the form of higher prices at the pump will likely dent consumer spending elsewhere. The recent surge in policy uncertainty due to the war may prevent companies from raising headcounts. This would nudge the unemployment rate higher in the coming months, even as companies abstain from laying off workers. This in turn could further cap personal income growth and restrain economic performance in 2026. Even if diplomacy prevails, the negative shock to the economy is already set in motion. Spillovers are likely to extend into the second half of the year—even if a peace agreement is reached in the coming weeks.U.S. Outlook: Rising Risk of War Spillovers into H2 2026
A clear resolution to the Middle Eastern conflict is uncertain and likely to be complicated and along a non-linear path. We expect that the most likely base case is a prolonged stalemate, where neither the U.S nor Iran is willing or able to make the concessions needed for a comprehensive deal.
In this environment, blockades of the Strait of Hormuz persist, disrupting global trade and dampening GDP growth. At the same time, the pressure continues to mount for the U.S. to find an off-ramp—politically if not strategically.
Hence, the TCB continues to forecast higher inflation and lower growth. Higher inflation may divert limited consumer funds towards energy and other affected products and services, thus weighing on real consumer spending. As a partial offset, higher oil prices may boost domestic oil production, delivering a positive contribution to GDP from non-residential structures investment and exports. The need to replenish ammunition supplies could also lea
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