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Americans are paying for the war in Iran with higher gasoline prices, but several recent economic indicators suggest that tax refunds and an artificial intelligence-driven investment boom have softened some of the impact for now.
The inflation picture showed prices accelerating in March. The Commerce Department reported that the Personal Consumption Expenditures price index—the inflation gauge favored by the Federal Reserve—rose 0.7% from February to March and 3.5% from a year earlier, the biggest year-over-year increase since May 2023. The same data showed prices outpaced incomes again in March, with wages, business income and government benefits not keeping pace with rising consumer costs.
Gas prices drove much of the month’s jump. Gasoline prices rose 21% in March from February after Iran responded to U.S. and Israeli attacks by closing the Strait of Hormuz and creating what the AP described as the biggest disruption to oil supplies in history.
Despite the cost pressure, the broader economy kept expanding. Thursday’s reports said gross domestic product grew at a steady 2% annual pace from January through March, slower than economists expected but a rebound from 0.5% growth in the final three months of 2025. The AP said the government’s 43-day shutdown in the October-December quarter shaved more than a percentage point off growth.
Investment activity offered another bright spot, tied to the AI boom. Excluding housing, business investment surged 10.4% in the first quarter—described by the AP as the biggest jump in nearly three years. Meanwhile, consumer spending, which makes up about 70% of U.S. economic activity, expanded at a 1.6% annual pace from January through March, with AP attributing the support to large tax refunds connected to President Donald Trump’s 2025 tax cuts.
That boost may be temporary. Oxford Economics chief U.S. economist Michael Pearce wrote that rising tax refunds were outpacing the increase in gasoline spending “two to one in March and most of April,” but that as the “tax refund season” ended and gas prices kept climbing, the drag on consumer spending would become more evident in May.
The immediate gasoline numbers remained elevated. The AP reported the average price for a gallon of regular gasoline jumped another 7 cents overnight to $4.30, compared with $3.18 at the same point last year, and said gasoline prices set new multi-year highs in each of the prior three days.
With households forced to spend more on gasoline, economists expect consumers to cut back other spending, which could pull down growth. Joe Brusuelas, chief economist at RSM, downgraded his forecast for U.S. economic growth this year to 1.7% from 2.4% he previously expected, linking the shift to what he described as an adverse and growing supply shock caused by the Iran war. Brusuelas said the war and the ensuing supply shock “altered the probable growth path this year,” according to the AP.
In the background, central banks face a difficult tradeoff. Higher prices raise concerns about inflation, but slowing growth could argue for rate cuts; the AP reported the Federal Reserve and other major central banks—including the Bank of England, the Bank of Japan and the European Central Bank—were holding their policy rates steady as they assess the conflict’s economic impact.
So far, labor market data suggested fewer layoffs. The Labor Department reported that the number of Americans applying for unemployment benefits—the AP’s proxy for layoffs—fell last week to the lowest level in more than 50 years. The AP said companies are not letting workers go, but hiring has not been strong either: job growth last year was the weakest outside a recession since 2002, and it has been “up and down” so far in 2026, with 160,000 new jobs in January, 133,000 jobs eliminated in February, and 178,000 added in March.
Economists also described a “no-hire, no-fire” scenario that can lock young applicants out of the job market, while another concern is growing worries that artificial intelligence could reduce entry-level opportunities.