Key facts
- A war in Iran and the closure of the Strait of Hormuz have disrupted approximately 20 million barrels per day of oil flow.
- Headline CPI inflation is forecast to peak at 4.5% by the end of 2026, with core inflation peaking at 3.5% in Q2 2027.
- US GDP growth is expected to remain at 2.1% in 2026, with the unemployment rate rising to 4.5%.
- The Federal Reserve is expected to hold interest rates steady throughout 2026.
- US economic growth in Q4 2025 was revised down to 0.7%, below expectations.
The U.S. economy is facing a new inflationary shock driven by a war in Iran and the closure of the Strait of Hormuz, which has disrupted approximately 20 million barrels of oil flow daily. This oil shock has replaced tariffs as the primary threat to the economy, which had begun to stabilize after earlier tariff-driven inflation.
The UCLA Anderson Forecast expects GDP growth to hold at roughly 2.1% in 2026, with inflation peaking at 4.5% and unemployment rising modestly to 4.5%. The forecast notes that the 2020s are beginning to resemble the 1970s due to a sequence of supply shocks. Tariff inflation is seen as having peaked, with the overturning of many tariffs expected to have a small downward effect on core inflation compared to the impact of the Iran conflict.
The labor market has remained stagnant, with payroll growth averaging 76,000 jobs per month in early 2026. The Federal Reserve, which cut rates late in 2025 due to labor market weakness, is now expected to hold rates steady as it monitors inflation persistence and labor market conditions.
Earlier in 2026, the U.S. economy showed signs of weakness, expanding at a slower-than-expected 0.7% in Q4 2025. This slowdown was attributed to weaker consumer spending, exports, government spending, and investment. The situation was further complicated by a February 2026 Supreme Court ruling that deemed the administration's use of emergency powers to implement tariffs unconstitutional.