Milder Economic Shock, Surprisingly Improved Growth Outlook
The latest monthly survey of economists conducted by The Wall Street Journal reveals a notable shift in assessment. The direct economic impact of the U.S.-Iran military conflict on the American economy has been far less severe than the widespread concerns held by academics and markets prior.
Survey data indicates forecasters now expect the U.S. economy to grow by 2.1% this year, a slight increase from the 2% estimate in April. This growth is calculated based on inflation-adjusted GDP from Q4 2025 to Q4 2026. A more optimistic signal is that the average probability economists assign to a U.S. recession within the next 12 months has fallen from 33% in April to 25%, the lowest level since early 2025.
The Growth Trade-off: Stubborn Inflation Emerges as Key Concern
However, the improvement in growth prospects comes with a significant cost. The survey uncovers a more troubling trend: the conflict is cementing inflation that was already above the Federal Reserve's 2% target, making it more persistent.
Broad-Based Upward Revisions to Inflation Forecasts
Economists now expect the Consumer Price Index (CPI) to rise 3.4% in the 12 months through December, up from the 3.2% forecast in April. This suggests inflation concerns have extended beyond the conflict's direct boost to energy costs, permeating broader sectors of the economy.
Deteriorating Core Metric Forecast Squeezes Fed's Policy Room
The most critical signal comes from the core inflation metric pivotal to Fed policy decisions. Economists project the core Personal Consumption Expenditures (PCE) price index, which excludes volatile food and energy prices, will rise 3.2% in 2026. This figure is markedly higher than the 2.9% forecast in April.
This upward revision implies the stickiness of inflation has exceeded prior judgments. The direct consequence is a rapid narrowing, if not disappearance, of the Fed's policy space for cutting interest rates to stimulate the economy. The Fed's policy scales may be forced to tilt further toward curbing inflation over supporting growth.
The overall economic picture presents a complex duality: short-term growth shocks are manageable, but medium-to-long-term structural inflationary pressures are intensifying. This poses greater challenges for future macroeconomic policymaking.