As the United States approaches the crucial midterm elections, the ongoing conflict in Iran is exerting significant pressure on the domestic economy and shaping voter perceptions. While the latest GDP figures suggest robust growth, the reality of rising living costs, fuel prices, and inflation presents a complex picture. Former President Donald Trump, poised to leverage these economic indicators for political gain, faces a populace increasingly concerned about their financial wellbeing.
Economic Growth Amidst Turmoil
In the first quarter of 2026, the US economy demonstrated resilience, posting an annualised growth rate of 2%. This follows a slowdown observed at the end of 2025 and presents a critical talking point for Trump as he campaigns for Republican candidates in the upcoming midterms. The growth, however, is juxtaposed against a backdrop of escalating consumer challenges, primarily driven by tariffs and the recent energy shock resulting from the ongoing military engagement in Iran.
Economists, while noting this positive growth, have highlighted a shift in the drivers of the economy. James Knightley, chief international economist at ING, remarked that as consumer spending cools, investment in technology, particularly artificial intelligence, has emerged as the primary engine of growth. “Investment linked to tech and AI has clearly become the main engine of growth in the US,” he stated, suggesting a pivot away from traditional consumer-driven economic expansion.
Rising Costs and Consumer Sentiment
Despite encouraging headline figures, the prevailing sentiment among American voters is likely to revolve around the immediate impact of rising living costs. The conflict in Iran has caused a spike in oil prices, with Brent crude reaching a peak of $126 per barrel, marking a significant increase from approximately $73 prior to the outbreak of hostilities. Although prices have since receded to around $111, the effects on consumer behaviour are palpable.
By the end of April, the cost of fuel had surged to $4.30 (£3.17) per gallon, significantly up from less than $3 in February. This sharp increase has contributed to a troubling rise in inflation, with March’s annual inflation rate hitting 3.3%, a near two-year high that presents a stark contrast to February’s 2.4%. As voters head to the polls, their decisions are likely to reflect these immediate economic pressures rather than abstract growth figures.
Interest Rates under Pressure
The economic turmoil stemming from the Iran conflict has also influenced the Federal Reserve’s monetary policy. Recent inflation figures have dashed hopes for an interest rate cut, with the Fed maintaining its base rate at 3.5% to 3.75%. The expectation had been for a series of cuts prior to the war, but the sharp rise in oil prices complicates the outlook.
As the conflict continues, the average interest rate for a 30-year mortgage has climbed from 5.98% to 6.3%, according to Freddie Mac data. Samuel Tombs, chief US economist at Pantheon Macroeconomics, suggests that sustained high oil prices could delay potential rate cuts until 2027, further constraining consumer spending and investment.
Stock Market Resilience
Amid these challenges, the stock market has shown remarkable resilience. Major indices, including the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, have largely recovered from initial war-related losses, with the Nasdaq gaining around 10% since the onset of the conflict. The S&P and Dow have also posted gains of approximately 5% and just over 1%, respectively.
This upward trajectory is promising for investors and those with retirement savings tied to the stock market, such as 401(k) plans. However, as the Republican Party faces potential losses in both the House and Senate, the stark contrast between stock market performance and the realities of daily life may complicate Trump’s narrative as he seeks to rally support.
Why it Matters
The interplay between economic indicators and the cost of living will be pivotal in determining voter sentiment in the upcoming midterms. While the GDP growth and stock market performance may provide solace to some, the stark reality of rising prices and inflation will likely dominate voters’ concerns. As the conflict in Iran continues to unfold, its economic ramifications will shape not only the political landscape but also the everyday lives of Americans, making the upcoming elections a referendum on both the economy and leadership in a time of uncertainty.
