US: Inflation is rising, the Fed is waiting, and forecasts are getting weaker

• Economists have downgraded the U.S. outlook as the Iran conflict and higher energy prices are expected to push inflation higher, weaken consumption, and slow GDP growth.
• Inflation forecasts have risen sharply, and the Fed may delay rate cuts until it is clearer whether energy-driven price pressures will persist.
• The economy is still growing, supported partly by AI and data center investment, but recession risk has increased and growth is becoming more fragile and dependent on fewer supports.

Economists have clearly downgraded their outlook for the U.S. economy, concluding that the war with Iran and rising energy prices will weigh increasingly heavily on economic activity in the coming months. At the center of these concerns are higher inflation, weaker consumption, slower GDP growth, and a deteriorating labor market. More and more often, the conflict in the Middle East is being viewed not as a temporary disruption, but as a new inflationary shock that could make it harder to maintain a balance between growth and price stability.

Inflation is once again becoming a bigger problem

According to a Bloomberg survey, the average forecast for growth in the PCE index—one of the most important measures of inflation in the U.S.—has risen for this year to 3.1% from the previous 2.6%. This is a significant shift, showing that economists are beginning to assume a more lasting impact of higher energy prices on prices across the entire economy. An additional warning signal comes from the OECD, which expects average inflation in G20 countries to reach 4% this year, whereas as recently as December it had projected 2.8%.

At present, the conflict is having its strongest impact through the fuel and energy markets. Gasoline prices in the U.S. have risen by more than 30% this month, to around $4 per gallon, marking the biggest jump since Hurricane Katrina in 2005. Higher fuel and transportation costs are already increasing the burden on households, and in the coming months they may also translate into higher food prices and prices for other consumer goods. There are also concerns about fertilizer shortages, which could push prices in stores even higher.

Economic growth is weakening, and the labor market is sending worse signals

The worsening outlook is also visible in economic growth forecasts. Economists now expect U.S. GDP to grow by 2.3% this year, compared with the earlier forecast of 2.5%. The scale of the revision does not yet suggest a sharp downturn, but it does confirm that the economy is beginning to feel the effects of rising energy costs and greater uncertainty more clearly.

Weaker forecasts also apply to the labor market. The expected average monthly number of new jobs has been revised down to 43,000 from 70,000, while the average unemployment rate is projected to reach 4.5%. This means that the labor market should remain relatively stable, but the pace of improvement is expected to be much weaker than previously assumed. At the same time, the probability of a recession over the next 12 months has increased from 25% to 30%, showing that concerns about the economy’s condition are becoming more widespread.

The Fed may wait longer before cutting interest rates

Higher inflation and greater uncertainty have also affected expectations for the Federal Reserve. Economists have pushed back their forecast for the first interest rate cut to September, concluding that the Fed will need more time to assess whether the rise in energy prices is temporary or whether it is beginning to spread more permanently throughout the economy. This is an important change, because until recently the market had been counting on faster monetary easing that could support consumption and investment.

Wall Street is lowering expectations, but it is not yet talking about a crisis

A more cautious view is also evident among the largest financial institutions. Goldman Sachs assesses the risk of recession at 30% and assumes that the unemployment rate will rise to 4.6% by the end of 2026. Morgan Stanley, meanwhile, has lowered its forecast for consumption growth in 2026 to 1.7% from 2.0%, indicating that higher energy prices will largely offset the positive impact of larger tax refunds.

Even so, a deep downturn scenario is not yet dominant. Some economists believe that the U.S. economy may still grow at around 2% in 2026, mainly thanks to investments in data centers and the artificial intelligence sector. These are areas less dependent on expensive imported energy than traditional industries. However, this scenario is resting on an increasingly narrow foundation, as it depends mainly on sustained investor optimism toward AI and on the resilience of spending by wealthier consumers.

Consumption is still holding up, but that resilience may be limited

So far, consumer behavior data do not show a clear breakdown. JPMorgan and Bank of America indicate that by mid-March there were no strong signs of a slowdown in credit card spending. This suggests that American households are still maintaining relatively solid purchasing activity. Economists note, however, that even a quick end to the conflict would not necessarily mean a quick disappearance of its effects. The impact on the oil market, transportation, and production costs may persist much longer, sustaining inflationary pressure and limiting the strength of any rebound.

The U.S. economy is becoming more fragile

The current picture of the American economy does not yet point to a sharp deterioration in conditions, but it clearly shows the system’s growing fragility. Higher energy prices are pushing inflation upward, weaker labor market and GDP forecasts are weighing on sentiment, and the Fed may be forced to maintain restrictive monetary policy for longer. As a result, the U.S. economy remains on a growth path, but it is increasingly dependent on a few narrow pillars, such as AI investment and the relative resilience of consumption. The war with Iran is therefore beginning to act as a new destabilizing force—one that is not yet triggering a recession, but is clearly increasing the risk that the economy will become less resilient to future shocks.