Wall Street Journal investigation: Iran war shock is below expectations, but inflation is more stubborn

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Jinse Finance reports that a this month Wall Street Journal survey of economists shows that the impact of a war with Iran on the U.S. economy is far lower than economists had previously worried. But the bad news is that the war has made inflation—already above the Federal Reserve’s 2% target—more stubborn and has removed the Federal Reserve’s room to cut interest rates. Compared with the April survey taken about one month after the outbreak of hostilities, economists’ views have changed significantly. Forecasts expect that, based on inflation-adjusted GDP for the period from Q4 2025 through Q4 2026, the U.S. economy will grow 2.1% this year, higher than the 2% estimate in April. Economists’ average expected probability of a recession over the next 12 months has fallen from 33% in April to 25%, the lowest level since early 2025. However, even as the growth outlook improves, concerns about inflation are intensifying. Economists expect that, in the 12 months through December, CPI will rise 3.4%, higher than 3.2% in the April survey. Inflation concerns have surpassed the boost to energy costs from the war. Economists forecast that PCE inflation excluding food and energy—closely watched by Federal Reserve officials—will rise 3.2% in 2026, higher than the 2.9% forecast in April.
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