The economic impact of the war in Iran on the mid-term elections

 The economic consequences of the war in Iran for American citizens have been reflected at the ballot box. Following the Republican Party’s defeat in the mid-term elections, after months of “winning, winning, winning”, even Donald Trump admitted as much to the Wall Street Journal: “Iran played a part in all this”.

Two years ago, he returned to the White House, accusing the Biden administration of having caused inflation to rise by 50 percentage points in three years (a false claim: cumulative inflation in the United States over the four-year period 21–24 stood at 21 per cent). “We will immediately put an end to the devastating inflationary crisis, and we will lower interest rates and the cost of energy,” he had promised. But the war in Iran has produced the opposite results: the cost of diesel in the United States has risen by 65 per cent (on 2 November, according to the US Energy Information Administration, it cost $6.29 per gallon compared with $3.81 on 23 February) and the Federal Reserve was forced to raise interest rates due to inflation, when in September the energy index stood at +20.4 per cent year-on-year.

According to NBC’s national exit poll, three in four voters view the state of the US economy negatively, whilst according to another CNN poll, also conducted on Tuesday evening, 88 per cent of voters said that the cost of living had been a ‘decisive’ or ‘important’ factor in their vote. The Wall Street Journal, citing an estimate from Brown University’s Climate Solutions Lab, reports an average additional cost, from the start of the war to mid-October, of $600 per household in Iowa, Kansas, Michigan and Texas solely due to rising petrol prices (in Texas, a Democratic governor, Gina Hinojosa, was elected for the first time in 30 years).

Following last year’s cuts, the further reductions that Trump has been calling for over the past year to tackle the cost of living have never materialised. To secure them, the US president even threatened last year to sack the former Fed chair Jerome Powell, thereby jeopardising the independence and credibility of the world’s most important central bank. On the contrary, the rise in oil prices triggered by the closure of the Strait of Hormuz helped to keep inflation at 3.7 per cent in September, when the Fed raised interest rates to 3.75–4 per cent, before keeping them unchanged in its October decision.

The yield on the 10-year Treasury bond, the benchmark for new fixed-rate mortgages, rose from 4.02 per cent on 26 February to 4.91 per cent on 2 November. According to Freddie Mac, one of the financial institutions established by Congress, the average rate on 30-year mortgages – partly due to US economic growth remaining strong, at 3.4 per cent annualised in the third quarter of 2026, and high demand for credit – rose from 5.98 per cent on 26 February to 7.24 per cent on 29 October: On a $400,000 mortgage, this amounts to an extra $333 a month, or nearly $4,000 a year, excluding taxes and insurance. According to a survey by the University of Michigan, in October around 85 per cent of respondents considered this a bad time to buy a home, with 62 per cent citing high interest rates as the reason. On 30 October, Alberto Musalem, President of the St Louis Fed, said that another rate rise would be needed ‘soon’ and that inflation expectations remained anchored.

Would the Fed have cut interest rates had there been no war in Iran? There is no way of knowing, but it certainly raised them in response to inflation fuelled by the war. A war which is obviously also weighing on the federal budget. As of 16 October, the Pentagon estimates costs at $47.1 billion, including those for replacing lost ammunition and equipment, but not damage to US bases. Meanwhile, a 15 September report by the Congressional Budget Office (CBO) estimates that the conflict has already pushed up yields on three-month Treasury bills maturing in 2026 by almost 0.2 percentage points, contributing to pressure on sovereign bond markets.

In any case, yesterday, whilst the Dow Jones opened 1.9 per cent higher and Brent crude fell to around $102 a barrel, Vice-President J.D. Vance commented on the midterm results on social media: “We lost because of the war. If you want to argue that it was worth it, even at the cost of losing the Senate for six years, go ahead. But everyone knows why we lost, and any honest conversation about where to go from here must start from this point.” Last night, Trump agreed with him “for the most part”, acknowledging the impact of rising fuel prices on the vote. But he still defended the war: “We had no choice.”