The Faltering War Economy: Trump's war craters the economy in multiple ways, even if it somehow ends soon. [View all]

https://prospect.org/2026/04/14/faltering-war-economy-inflation-gas-prices-trump/


Gas prices in Los Angeles, April 7, 2026. President Trump has conceded that prices may not go back to where they were by the midterm elections. Credit: Damian Dovarganes/AP Photo

On Friday, the Labor Department reported inflation numbers for March. Inflation, driven by the Iran war, broke out of its recent well-behaved pattern, as consumer prices rose by an annual rate of 3.3 percent, almost a full point above its February rate. The April report will surely be worse. But that was only the headline. Retail gas prices were up 21.2 percent and have continued to rise in April; and other goods dependent on oil are up as well. And the problem isn’t just prices but shortages, as detailed in our new series Aftermath about the economic consequences of the war.

With higher prices, consumers have less disposable income. Real hourly earnings were down 0.6 percent in March. Consumer pessimism leads to further reluctance to spend. The University of Michigan’s consumer sentiment index fell to its lowest level on record. The initial April reading, of 47.6, was down almost 11 percent and well below last April. The employment picture has been weak as well. The monthly unemployment rate has bounced around, but job creation is well below trend. The average rate of job growth over the past six months is under 20,000 a month, down from over 100,000 a month before President Trump took office. And artificial intelligence will also eat into employment, whether because of legitimate productivity gains or because hiring managers use it as an excuse to cut jobs.

The one area of job growth is the health care sector. But that’s mostly a sign of sickness, reflecting the gross inefficiency of our for-profit health care system. With Trump’s war on immigrants, employers are having a hard time filling many service-sector jobs, raising costs. There is a name for this overall picture: stagflation, which refers to the improbable simultaneous combination of rising inflation and rising unemployment. This in turn leaves the Federal Reserve with no good options. If the Fed runs true to form, it will give priority to trying to damp down inflation by raising interest rates, which will slow the economy further and put people out of work.

At the Fed’s last meeting, on March 17-18, despite Trump’s pressure to cut rates, only one member of the Federal Open Market Committee voted for a rate cut. At the next meeting, on April 28-29, there could be rate increases. Price increases driven by an external shock, in this case the price of oil, violate the usual connection between inflation and unemployment. Inflation is high and rising not because the economy is running too hot, but because of a sudden spike in the cost of one major input that cycles into other price increases. That same price increase weakens the economy and adds to unemployment. If the Fed raises interest rates, that will only further crater the economy.

snip