Results of the 2024 presidential election reaffirmed what consumer surveys had indicated: The American people don’t like inflation. A large chunk of President Donald Trump’s campaign was centered on the cost of living, from energy to housing to interest rates. Even with the most expansive tariff policy since the Great Depression, the Trump 2.0 agenda made gains on the inflation front. But now the war in Iran, approaching its 13th week, is at risk of reversing these advances.
With more than five months until the midterms, it will once again be the economy, stupid.
Iran War Threatens Trump 2.0
A New York Times-Siena poll, released on May 18, found that 64% of Americans say Trump made a mistake launching a joint attack against Iran. Similar findings were highlighted by the Pew Research Center in March, with 59% saying the United States made the wrong decision. Only 31% approve of the president’s handling of the conflict, according to YouGov. Liberty Nation News’ Public Square data suggest just 40% approve of the war.
Considering how Middle East tensions are adversely affecting Americans’ pocketbooks, these numbers are not entirely surprising. While the president suggested on May 20 that Washington and Tehran are in the “final stages” of peace negotiations, skepticism is warranted.
In the meantime, various economic indicators are flashing red. These statistics are not confined to wonkish economists combing through Bureau of Labor Statistics reports. They are the major headline figures everyone can see in plain sight, whether it is the price of gas or mortgage rates.
April’s US annual inflation rate jumped to a three-year high of 3.8%, driven almost entirely by energy. An early look at the May consumer price index (CPI) report suggests the 12-month rate will top 4%. When Trump took office in January 2025, it was sitting at 3%.
But while economists say it is vital to look through the war-fueled oil price shock, underlying trends have become concerning. Core inflation, which removes energy and food for their volatility, is inching closer to 3%. Critics would be quick to say the president’s aggressive trade agenda is still being absorbed by the marketplace, but tariff-sensitive items have been mixed – or tepid at best.
Whatever measurement the professional or armchair economist uses, higher prices are eating away at real (inflation-adjusted) wage gains. A significant black eye on the previous administration was negative earnings growth. While cumulative real wages remain in positive territory (0.8%), they are swiftly declining.
The key question is: How long will this last? Will inflation return to pre-conflict levels in time for the midterms? Market experts argue that global energy markets are still being affected by the war’s initial effects. The global economy will then wrestle with the secondary effects, which could leave crude prices above $60 to $70 a barrel. This does not mean there will be immediate relief at the pump, so motorists will still pay $4 a gallon for gas or diesel for a while.
Fed Policy
Persistent inflation will also likely prevent any interest rate cuts or lower Treasury yields.
The consensus is that the Fed will maintain a high-for-longer policy stance, with the federal funds rate remaining in the current target range of 3.5% to 3.75%. However, a growing chorus of traders is pricing in a rate hike soon, even with a new sheriff in town at the Eccles Building.
As the last couple of years have shown, a central bank in an easing cycle matters little to the US government bond market. For the first time since the global financial crisis, the 30-year Treasury yield reached almost 5.2%. The primary benchmark ten-year yield is at a one-year high of about 4.1%. The two-year, which tracks Fed policy expectations, is above 4%.
These are worrisome trends for the broader economy because they send various signals, from fiscal fears to growth groans. But inflation is the big one. Whatever the reason is, higher yields lead to higher borrowing costs for consumers, on top of rising prices. This is apparent in the US mortgage market, which monitors the bond market, specifically the ten-year.
For the week ending May 15, the average US 30-year fixed mortgage rate climbed to 6.56%, according to the Mortgage Bankers Association. This represented the fourth straight weekly jump and the highest level since the end of March. Other measurements, such as Mortgage News Daily, suggest the 30-year mortgage rate is higher.
Growth Story
There was the ugly. There was the bad. But there is also some good.
Economic growth is expected to be solid in the current quarter. The widely watched Atlanta Federal Reserve GDPNow Model estimate indicates the economy will expand about 4% in the second quarter, up from the good-but-not-great 2% in the first three months of 2026. The regional central bank says consumer spending and business investment are driving the gains.
US energy dominance has also been on display as of late, a critical facet of the Trump 2.0 agenda. Exports of oil and petroleum are at an all-time high, which could further bolster GDP this year and plug the trade imbalance.
War, What Is it Good For?
Like tariffs, Trump averted a disaster with last year’s strikes on Iran and the regime change operation in Venezuela. This time, the continued joint US-Israeli operation in the Middle East is proving to be a quagmire that will unlikely lead to any significant progress, whether politically or economically. The only victory at this point would be permanently reopening the Strait of Hormuz, which was already open before the conflict began.
