President Donald Trump has repeatedly stated that gasoline prices will "drop like a rock" once the Iran war ends, a prediction that overlooks the broader impact of his administration's policies on the U.S. economy. While energy costs may decline initially, structural inflationary pressures from tariffs and supply chain disruptions are likely to keep consumer prices elevated for several quarters after the conflict concludes.
Since his second-term inauguration in January 2025, major U.S. stock indexes have reached new highs, driven by the artificial intelligence infrastructure build-out, strong corporate earnings, and record share buybacks. However, this market performance has occurred alongside persistently elevated inflation. The average annual return of Wall Street's major indexes under President Trump has been higher than under most other presidents over the last 130 years, yet the Federal Reserve's preferred inflation gauge, Core Personal Consumption Expenditures (CPE), has remained stubbornly high.
The administration's "Liberation Day" tariffs, unveiled in early April 2025, have had a lasting effect on consumer prices despite being invalidated by the U.S. Supreme Court in February 2026. Research from three New York Federal Reserve economists published in Liberty Street Economics estimates that these tariffs added 2.9 percentage points to consumer goods inflation by February 2026. This pass-through occurs because duties on imported goods increase domestic production costs, which are then reflected in higher retail prices.
The Iran war has further compounded these inflationary pressures. Following the start of military action on Feb. 28, Iran shut down the Strait of Hormuz to commercial vessels, halting approximately one-fifth of the world's daily crude oil supply. This disruption caused gas prices to rise at the fastest pace in 30 years and pushed diesel prices to an all-time high last month. Even if the war ends officially, energy infrastructure in the region will take several months to ramp back up, and oil reserves may require even longer to replenish.
The inflationary impact extends beyond energy. Businesses are altering shipping routes and paying more for petroleum-based goods like plastics and synthetic polymers. Core PCE data indicates that these costs are being passed on to consumers. Headline inflation dipped from a three-year high of 4.2% in May to 3.4% in September, but Core PCE fell only from 3.2% to 3%. As of August, Core PCE stood at 3.0%, marking 66 consecutive months above the Federal Reserve's 2% target.
Federal Reserve Board member Kevin Warsh noted during a September press conference that inflation has been running above target for more than five years and remains too high. The CME Group's FedWatch Tool indicates a nearly 35% chance of the central bank raising interest rates by at least 100 basis points by September 2027. Rising lending costs could slow the debt-financed AI infrastructure build-out that has fueled recent stock market gains.