The Kiplinger Letter, Vol. 103, No. 11

FORECASTS FOR EXECUTIVES AND INVESTORS
Reported from Washington, D.C. • kiplinger.com • Vol. 103, No. 11

Iran is down but not out. What lies ahead for the military situation and its economic impacts?

IRAN

A clear-cut victory may prove elusive. American forces have performed effectively, and demonstrated the superiority of U.S. weaponry. But Iran’s regime remains in place, shows no signs of collapsing, and vows to keep fighting. Its defeat may require a ground invasion, a daunting scenario that President Trump appears unwilling to order.

Tehran is waging an economic conflict since it can’t defeat the U.S. on the battlefield.

The target: The region’s energy industry, a vital component of the global economy. Exports of oil and gas from the Persian Gulf are on hold, forcing some countries in the region to curb output. Tankers, refineries and other key energy facilities have been damaged by Iranian strikes. The longer this situation goes on, the harder it will become to restart energy exports whenever peace returns.

Barring a cease-fire, they will keep rising. Iran is betting that Trump will have to back off as voters sour on rising gas prices. He is betting the battered regime will fold first.

As of now, the most likely scenario seems to be an incomplete U.S. victory, in which Iran is left badly weakened, but defiant and intent on rearming for later.

The most serious economic risk of the war for the U.S.: Renewed inflation due to high energy prices, if the conflict drags on. The economy is likely strong enough to stay out of recession, even though higher gas prices would probably crimp spending by many consumers. But if high fuel prices last longer and filter through the economy more broadly, inflation could prove painful and force the Federal Reserve to nix plans to trim interest rates. That would weigh on housing and other credit-sensitive sectors. In that scenario, Trump would come under mounting political pressure to declare peace.

Farming. About half of urea fertilizer ships through the Strait of Hormuz, which Iran has effectively closed to maritime traffic, as does a fifth of global shipments of liquefied natural gas…vital to production as both a feedstock and an energy source.

The effects of higher energy prices on Europe would be even more significant. Roughly 20% of the European Union’s crude oil and natural gas imports is sourced from the Middle East. The EU’s vulnerability is heightened by depleted gas storage following a cold winter. As with the energy price shock in 2022, a persistent rise in fuel prices now could spark another round of high inflation and hits to GDP growth.

FINANCE

Look for the dollar to continue to strengthen over the next few months. It has gained about 2.4% over the past month and 1.5% since the beginning of the conflict in Iran. The fact that the U.S. has become a net exporter of petroleum is an advantage that will likely increase the dollar’s appeal as a safe-haven asset. The U.S. financial markets are the largest and most liquid in the world. That liquidity can help reduce the difference between buying and asking prices for financial assets during periods of uncertainty, such as what markets have experienced in recent days.

The jump in gasoline prices will push overall inflation up from the 2.4% level reported for Feb. How high inflation goes depends on how long oil and gas exports from the Middle East are disrupted by the war and on damage to energy infrastructure. But measures of inflation that strip out volatile energy prices were already running at levels well above the Federal Reserve’s 2% target. We expect core inflation to hit 3% by the end of the year, even without a major energy price shock stemming from Iran.

The Fed will have little choice but to hold off on interest rate cuts for now. It usually discounts energy price swings. But it won’t be able to dismiss this one.

Slightly lower global IT spending in 2026 if the conflict lasts a few months, though even a shorter duration could be a drag on some categories of IT spending. Any energy price increases will lead to higher prices of chips and electronics because of higher prices of raw materials and shipping. Businesses and governments are likely to focus on IT priorities, especially artificial intelligence and cybersecurity. The threat of cyberattacks from Iran and elsewhere will lift cybersecurity spending.

The conflict has interrupted one-third of the world’s helium supply, which could become an even longer-term disruption if fighting doesn’t stop soon.

Helium’s uses include crucial parts of the chipmaking process. The gas is ionized and used to etch silicon wafers. Qatar is home to one of only two plants in the world that produce semiconductor-grade helium. Output has been halted.

The U.S. remains the world’s largest producer of helium, a by-product of natural gas production. While spot prices have spiked, supplies of the gas are primarily secured via long-term contracts, which could insulate some users.

Shipping disruptions could also hike prices of all sorts of electronics, because of the complex global supply chain of semiconductors, smartphones, etc. The chip supply chain includes a network of over 16,000 suppliers worldwide. Note that the majority of global smartphone shipments are transported by air, and airports in the UAE and Qatar are major hubs of international shipping.

Look for the already severe memory shortage to worsen, with prices heading even higher. Note that militaries will be buying lots more advanced chips and memory for munitions and drones, another factor that will drive up prices.

Consumers could hold off on smartphone, PC and other device upgrades if consumer sentiment continues to drop and device prices keep increasing. Even the used smartphone market will feel the pinch, since many spare parts used in the refurbishment process are shipped by sea from the Middle East.

TRAVEL

But travel to the Middle East is another story. Hot spots like Abu Dhabi and Dubai have seen their tourism industries disrupted by the widening conflict, which threatens to derail the Arabian Peninsula’s decades-long travel boom.

Missiles have hit several iconic buildings and hotels in Dubai, on the heels of a record number of visitors in 2025. The Gulf states have built their tourism empire on a reputation for security and safety. That likely will take years to repair.

POLITICS

Up until now, Congress hasn’t stood in the way of the U.S. war with Iran. Recently, the House and the Senate both narrowly rejected resolutions to curb President Trump’s war powers, the vote mostly split along partisan lines.

But as the White House encounters setbacks, that could quickly change.

A big test will come when the White House asks Congress to fund the war. Trump is expected to ask for about $50 billion, though the number may be larger. Still, the process could get messy, as some lawmakers may demand money for nonwar priorities in exchange for their votes, such as tariff relief or farm aid.

Lawmakers will be even less enthusiastic to OK more money in the future. The war is estimated to cost $1 billion per day. Some costs are budgeted already, though most are not. If the war drags on, Trump will have to ask Congress for more money, a proposition that will put Republican fiscal hawks in a bind.

A prolonged war likely would mean spending cuts to nondefense agencies, as lawmakers look for ways to pay for it without further increasing the U.S. debt.

CONGRESS

Congress is facing a potential legislative bottleneck, with President Trump saying that he’ll refuse to sign most new legislation passed until lawmakers approve a stalled GOP proposal that calls for strict new national voting requirements.

The SAVE Act would require proof of citizenship when registering to vote, and a photo ID at the time of voting. The bill passed the House along partisan lines and now awaits action in the Senate. Republicans largely support the bill, saying that it would stamp out voter fraud. Democrats argue that it would block millions of Americans from legitimately voting and that there are already antifraud safeguards.

Trump’s move puts pressure on Senate Majority Leader John Thune (R-SD). The bill doesn’t have the 60 votes needed to pass. But some Republicans are calling for Thune to use an obscure parliamentary tactic called the “talking filibuster,” which could allow the bill to pass with only Republican support. Thune is reluctant to go down that path, though he may be forced to if Trump persists in his demand.

Republicans aren’t keen on ending the practice, despite the president’s push to impose new restrictions, given its persistent popularity with voters of both parties.

The Republican Party at large has been slowly embracing mail-in voting in recent elections after downplaying its use. Republicans who have won tight races are wary of outlawing a voting method that at times puts them at an advantage. Some deep-red states, including Fla. and Utah, have a history of mail-in voting. And some Republicans worry that the proposal poses constitutional problems.

It’s not likely that Congress will take a serious swing at mail-in voting anytime soon, particularly since Democrats long have championed the practice.

Trump could try to force a ban on mail-in voting via executive action, although any such move almost certainly would trigger a barrage of lawsuits.

Mullin is President Trump’s pick to lead the Dept. of Homeland Security after the removal of Kristi Noem over a series of politically damaging controversies. The Oklahoman is well-liked and respected among his Republican colleagues and already has the support of at least one Democrat, Sen. John Fetterman (PA).

A big question is how he’ll handle immigration enforcement, one of the issues that landed Noem in hot water. Mullin has remained mum on the subject so far, but has generally supported more restrictive immigration policy as a senator.

The administration hopes that he’ll be a steadier hand than his predecessor, while remaining fiercely loyal to Trump. Despite her professed fealty to Trump, Noem had an unpredictable and micro-managerial style that frustrated many in her orbit.

ENERGY

Eventually. The top three makers of gas equipment…GE Vernova, Siemens and Mitsubishi Heavy Industries…all plan to expand their American factory footprints. Available capacity will hit 19 gigawatts by 2028, 49 GW by 2029 and 76 GW by 2030.

Lead times for natural gas turbines could start to decline next year. They have recently ballooned to an average of nearly five years after receipt of order.

Electric-vehicle chargers would need 100% domestic content to qualify for federal funding, according to a Federal Highway Admin. proposal, up from 55% under current rules. The move would require nearly all charger materials to be made at U.S. facilities, including iron and steel. The Trump administration says the move will promote the growth of domestic manufacturing. At the same time, critics contend that it is unfeasible, given the current state of the relevant supply chains. Components like LCD displays, circuit boards and more can’t be manufactured in the U.S. at scale.

This move follows the Trump administration’s failure to freeze funding for chargers from a $5 billion EV infrastructure program because of legal challenges.

DEFENSE

Producing enough next-generation aircraft. Per one estimate, the Pentagon will need at least 500 of them…300 F-47 fighter jets and 200 B-21 strategic bombers… to successfully counter Beijing, versus the 185 and 100 it currently plans to purchase.

The F-47 remains on track to enter into service by 2028, only three years after the Air Force awarded Boeing the contract. The next-generation fighter jet will have a combat radius of 1,000 nautical miles, nearly twice that of the F-22.

The B-21 bomber is expected to enter into service as soon as next year. The Air Force has inked a $4.5 billion deal with Northrop Grumman to up output.

The government’s aggressive tactics are here to stay and will jolt AI firms. Anthropic is challenging the Pentagon’s labeling it a supply chain risk, a designation used for suppliers (mostly foreign adversaries) that are a national security risk. The feud is over Anthropic requesting restrictions on fully autonomous weapons and mass domestic surveillance, citing civil-rights concerns and AI’s unreliability.

Anthropic has the best AI tools right now and is widely used by the military. The government says federal agencies have six months to stop using Anthropic. Anthropic opposes the attempt to push the ban further to all military contractors.

Other cutting-edge AI choices are available…OpenAI, Google, Meta, xAI and others. The Pentagon has new deals with OpenAI and xAI for classified networks.

Anthropic’s fast-growing business is at risk. With $20 billion in yearly sales and a $380 billion valuation, the start-up is eyeing an initial public offering this year. It continues to gain users, but some customers may be wary and opt for competitors, hoping to avoid confrontation with the administration. Meanwhile, other AI vendors will race to try to win future federal contracts worth hundreds of millions of dollars.

The government may also try to force Anthropic to build its desired AI tools by invoking the Defense Production Act, a Korean War-era law meant for steel mills and tank factories. Doing so would be a major escalation and invite legal challenges.

Tension over AI guardrails isn’t over. The Pentagon says a private company dictating the terms of use for military AI is untenable, and that it follows the law. OpenAI says that it continues to have red lines and will monitor military use.

Kiplinger is part of Future plc, an international media group and leading digital publisher. Visit our corporate site at futureplc.com. © 2026 Future US LLC, 130 West 42nd Street, 7th floor, New York, NY 10036. All rights reserved. Quotation for political or commercial use is not permitted. Duplicating an entire issue for sharing with others, by any means, is illegal. Photocopying of individual items for internal use is permitted for registrants with the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923. For details, call 978-750-8400 or visit www.copyright.com.