Inflation Surges as Iran War Drives Up Gas Prices

Happy Tuesday! The Senate voted 51-45 today to confirm Kevin Warsh to a 14-year term on the Federal Reserve's Board of Governors, setting up a separate vote expected as soon as tomorrow to have Warsh take over for Jerome Powell as the central bank's chair. But we've got so much more to tell you about tonight.

Pentagon Estimate of Iran War Cost Rises to $29 Billion

The cost of the war with Iran has risen to about $29 billion, a top Pentagon official told Congress Tuesday at House and Senate hearings on the Defense budget. The estimate, provided by acting Pentagon Comptroller Jules Hurst III, represents a $4 billion increase from the $25 billion price tag Hurst cited late last month. That initial estimate was greeted with much skepticism by Democrats and others who suggested that the real cost was closer to $50 billion.

"A lot of that increase comes from having a refined estimate on repair and replacement costs for equipment," Hurst told senators.

He added that the estimate does not yet include the cost of repairing damage from Iranian attacks on U.S. bases in the Persian Gulf region. "We don't know what our future posture is going to be," he said. "We don't know how those bases would be reconstructed and we don't know what percentage our allies and partners will pay for that reconstruction."

Hurst joined Defense Secretary Pete Hegseth and Joint Chiefs of Staff Chair Gen. Dan Caine in two hearings of the House and Senate Appropriations Subcommittees on Defense. His cost update comes as the Trump administration says that a ceasefire announced on April 7 remains in place and combat operations have mostly been halted, though negotiations toward a long-term peace agreement have failed to yield much progress.

Democrats criticized the war and the billions of dollars being spent on it, arguing the money could be put to better use, such as for an extension of the enhanced Affordable Care Act tax credits that were allowed to expire at the end of last year. Sen. Patty Murray, the top Democratic appropriator in the Senate, said the new estimate still seemed "suspiciously low" and questioned the administration's request for a $1.5 trillion Pentagon budget for fiscal year 2027.

"You're spending families' hard-earned tax dollars on a war that many strongly oppose, and you're forcing people to pay more at the pump, and yet you're not even providing a real breakdown of the cost of this war so far," she said. "We have no real details. You have indicated that. And yet now you want Congress to send you $1.5 trillion more. To me, that is unacceptable."

Murray also called the $1.5 trillion request "absurd" and argued that the proposed increase of roughly $500 billion compared to 2026 defense spending levels would come with severe tradeoffs that would hurt American families to the benefit of defense contractors. She noted that the proposed increase doesn't include an expected supplemental funding request for the Iran war. Hegseth repeatedly sidestepped questions about how much the Pentagon would seek in emergency war funding or when that request would be made.

"You want to increase the war budget for the next year by half a trillion dollars. That is taxpayer money that could be used to feed families or build new affordable homes or wipe out some diseases completely or increase child investments 20 times over, but you are asking us to blow it all on war," Murray said. "That is what this budget proposal is asking. It's going to leave Americans cold and hungry to fund Trump's war and make defense contractors a fortune, so that is why I hope this committee throws that in the trash and comes together with a budget that works for all American families."

Hegseth argued in response that Trump was protecting the nation against threats like those posed by Iran. "What is the cost of Iran obtaining a nuclear weapon?" Hegseth asked. "The fact that this president has been willing to make a historic and courageous choice to confront that, it comes with costs and we recognize that."

Inflation Accelerates to 3.8% as Fuel Prices Start to Bite

The annual inflation rate jumped to 3.8% in April as soaring fuel prices began to work their way through the U.S. economy, according to Bureau of Labor Statistics data released Tuesday. The annual reading is a bit higher than expected, and well above the 3.3% rate recorded in March.

On a monthly basis, the Consumer Price Index rose 0.6% in April. Energy prices, driven sharply higher by the war against Iran, accounted for more than 40% of the month-to-month increase.

The core inflation rate, which ignores volatile food and fuel prices, rose more modestly, edging higher by two-tenths of a percentage point to 2.8% on an annual basis. On a monthly basis, core prices rose 0.6%.

Although economists prefer to look at the core inflation rate to get a better sense of the underlying trend, consumers are typically more focused on the topline number, which reflects the prices they're paying at the grocery store and the gas pump - and those numbers have been painful.

Overall energy prices were up 18% year-over-year, while gasoline prices rose 28% over the last 12 months, and 5.4% in April alone. (The actual monthly increase in gas prices was even higher at 11.1%, but the seasonal adjustment used by government statisticians reduced the number as it factored in typical price increases ahead of the summer driving season.)

Rising fuel prices usually spill over into other areas. Airfares jumped 20.7% over the last year, thanks in part to a big jump in the cost of jet fuel. Electricity prices rose, as well, climbing 2.1% in a month. And higher prices for diesel fuel translate into higher food prices; tomatoes were 40% more expensive in April than a year earlier, in part due to soaring transportation costs, with tariffs and bad weather also playing a role. Overall, food prices rose 2.9% year-over-year in April, and 0.7% month-over-month.

Another thing consumers are likely to notice: The surge in prices in April means that wages are no longer keeping up with inflation. Wages were up 3.6% on an annual basis last month, but 3.8% inflation has now claimed that wage growth and then some.

What the analysts are saying: The sharp reduction in energy flowing out of the Strait of Hormuz continues to drive much of the inflation story. "It's like the aorta artery in your body," Boston College economist Brian Bethune told CNBC. "When that is choked down, it is the whole global economy that is affected."

The question most analysts are asking is how long the inflationary surge will last. Joseph Brusuelas, chief economist at RSM, expects the inflation rate to continue to rise, moving to 4% in the coming months. "Median American families are going to find it very challenging to adjust going into the second half of the year," he told The Wall Street Journal.

Mark Zandi, chief economist at Moody's Analytics, said he's worried about the inflationary trend. "Inflation obviously is high, and the direction of travel feels disconcerting," he told CNBC. "It does feel like the inflationary effects are broadening out and will impact the prices more broadly."

One key dynamic will be the ongoing price effects in the wider economy. "The first order effect from the conflict in the Middle East [has] been a shock to oil prices, which [has] translated very quickly to what consumers are paying at the pump, but the next frontier to watch is rising input prices for food and materials," said Skyler Weinand, chief investment officer at Regan Capital, per CNBC.

How this affects the Fed: The likelihood that elevated inflation will continue to dog the U.S. economy suggests that the Federal Reserve may have to postpone rate cuts and contemplate raising rates to help cool the inflationary surge.

"The fact that higher input costs from oil are being readily passed through to consumers, as well as other signs of broadening inflation impact, should both add to the Fed's worries about inflation," said Preston Caldwell, chief U.S. economist at Morningstar, per Yahoo Finance. "The odds of a rate hike in 2026, while still less than 50%, are rising."

The bottom line: Inflation is picking up again due to the war in the Middle East, and it looks like there is more inflationary pressure in the pipeline.

White House Holds Off on Cutting Beef Tariffs

The Trump administration is delaying its effort to reduce high beef prices by cutting tariffs on imported beef, The Wall Street Journal reported late Monday.

President Trump was reportedly planning to sign two executive orders on Monday that would reduce tariffs and provide support for ranchers to encourage the growth of the domestic cattle herd, but the administration decided to hold off amid pushback from Republican lawmakers and the beef industry.

Montana Republican Sen. Steve Daines said cattle ranchers would have "some concerns" about the plan, which is intended to lower retail prices but would likely also cut into the profits of domestic producers.

"Opening the way for more imports risked angering cattle ranchers, a reliable constituency of the president's," the Journal's Patrick Thomas, Gavin Bade and Lindsay Wise wrote. "Trade groups representing U.S. cattlemen opposed the administration's [previous] move to enable more beef imports from Argentina and on Monday criticized Trump's planned tariff move, warning that an influx of cheap meat would hurt American ranchers."

The administration did not say when it might move forward with the plan.

Trump's 'Golden Dome' Could Cost $1.2 Trillion: CBO

President Trump's proposed Golden Dome missile-defense shield could cost upwards of $1.2 trillion to develop and operate over 20 years, according to a new analysis by the non-partisan Congressional Budget Office.

The CBO cost estimate is far higher than those offered by the Trump administration. The director of the Office of Golden Dome for America has estimated that it would cost $185 billion to deploy the nascent system over 10 years, while the White House has requested $15 billion per year over the next five years to develop the project. Congress has approved roughly $24 billion for the project so far.

Lack of details: The huge disparity in cost estimates is likely due to the uncertainty surrounding the details of the project. The Department of Defense has not yet defined the overall architecture of the national missile defense system, making an objective cost estimate "impossible," CBO said.

Guided by Trump's "Iron Dome for America" executive order from January 2027, CBO analysts filled in the details for a system that would meet the requirements of a multi-layered missile defense system to develop their estimate.

The CBO's analysis includes funding for four distinct interceptor layers, some of which will rely on existing systems like Patriot missiles, as well as a space-based missile warning and tracking system, some of which require extensive research and development. The acquisition cost is estimated to be roughly $1 trillion, with a space-based system for detecting and destroying enemy missile attacks accounting for about 70% of the acquisition cost and 60% of the overall cost.

Questions about effectiveness: Despite the considerable cost, CBO warned that its projected system, which would be "far more capable than defenses the United States fields today," would not be perfect: "it would not be an impenetrable shield or be able to fully counter a large attack of the sort that Russia or China might be able to launch," CBO said.

Sen. Jeff Merkley, the senior Democrat on the Senate Budget Committee who requested the cost estimate, has made his opposition to the project clear, saying in a joint letter last year that it would be "prohibitively expensive, operationally ineffective, massively corrupt, and detrimental to U.S. and global security by igniting a nuclear arms race with Russia and China."

In response to the CBO analysis, Merkley said the Golden Dome would be "nothing more than a massive giveaway to defense contractors paid for entirely by working Americans," adding that he would "continue to work with my colleagues in the Senate to prevent another dime from flowing to this racket."

Number of the Day: $220 Million

Of the $1 billion in extra security funding proposed by Republicans in their budget reconciliation bill, the Secret Service plans to use $220 million "to harden the East Wing extension, including installing bulletproof glass, drone detection, biological threat filtration and detection, and other national security functions," according to details obtained by Bloomberg Government.

Senate Majority Leader John Thune told reporters today that about 20% of the proposed $1 billion will go toward security for the White House's East Wing modernization project - in other words, Trump's new ballroom and related work. "The balance of it is just going to other Secret Service priorities and technology and things they need to do to protect the president," Thune said.

Trump's Embattled FDA Chief Resigns

Dr. Marty Makary, the embattled head of the Food and Drug Administration, is resigning after 13 months atop the agency - a tenure marked by staff cuts, leadership churn, questions about his management and repeated clashes with the White House, the pharmaceutical industry and lawmakers.

"He's going to go on and he's going to lead a good life," President Trump said of Makary, confirming the resignation. "He was having some difficulty. He's a great doctor. He's going to go on and do well. Everybody wants that job."

Kyle Diamantas, the top food official at the FDA, will reportedly lead the agency as acting commissioner.

The move comes just days after reports that Trump had signed off on firing Makary. Trump reportedly had been angry that Makary was slow to authorize fruit-flavored vapes, which the president had pledged to bring back as part of his 2024 campaign. The FDA announced a week ago that it had authorized the vapes for adults.

Drugmakers criticized Makary over what they saw as inconsistency in FDA reviews of their products. The agency also faced criticism that its scientific work was increasingly guided by political pressure. And Republican lawmakers and anti-abortion activists criticized Makary over his handling of a review of the abortion pill mifepristone. Many conservatives want to see access to the drug restricted by reversing a Biden-era change that allowed for it to be dispensed via telehealth visits and the mail.

Why it matters: Makary's departure is the latest in a string of high-profile personnel changes in the upper ranks of the Trump administration over the past few months, following the firings of former Homeland Security Secretary Kristi Noem and former Attorney General Pam Bondi and the resignation under pressure of former Labor Secretary Lori Chavez DeRemer. Trump also recently withdrew his nomination of Casey Means to be surgeon general after she failed to secure the Senate support needed for confirmation. The latest personnel drama adds to long-running concerns about turmoil at the Department of Health and Human Services under Secretary Robert F. Kennedy Jr.

Fiscal News Roundup

• The Iran War Is Hitting Home as Gasoline Prices Fuel Inflation Surge of 3.8% in the US – Associated Press
• Trump: "I Don't Think About Americans' Financial Situation" When Negotiating With Iran – CNN
• Pentagon Puts War at $29 Billion as Hegseth Is Mum on Funding Request – New York Times
• McConnell Hammers Hegseth Over Pentagon Funding Plan, Alienating Allies – The Hill
• Senate Confirms Warsh for Seat on Fed Board, Clearing Path to Become Chair – Politico
• Trump FDA Chief Is Leaving After Angering Pharma CEOs, Vaping Lobbyists and Anti-Abortion Groups – Associated Press
• Senate Republicans Weigh Whether to Swallow Trump's $1B Push for Ballroom Security – CNN
• Trump's Proposed 'Golden Dome' Estimated to Cost $1.2 Trillion, Far More Than He Initially Said – Associated Press
• Florida Plans to Close 'Alligator Alcatraz,' Vendors Are Reportedly Told – New York Times
• 'Personal to the President': Companies Try to Avoid Trump's Wrath Over Tariff Refunds – Politico
• One in Five HealthCare.gov Enrollees Dropped Insurance Coverage This Year – NOTUS
• Trump Downplays Differences With China's Xi Over Iran as He Heads to Beijing for High-Stakes Summit – Associated Press
• Trump Nominates Cameron Hamilton, Fired After Defending FEMA, to Lead the Agency – Associated Press
• Trump Nominates David Cummins to Lead TSA Amid Challenges – Associated Press
• Raskin Accuses Patel, DOJ of Millions in Improper Settlements to Former FBI Agents – The Hill
• Mamdani Announces Balanced Budget Without Cuts – American Prospect

Views and Analysis

• Is Trump's Affordability 'Pivot' Enough? – Punchbowl News
• Why Kevin Warsh Is Likely to Run Afoul of Trump at the Fed – Politico
• Kevin Warsh Is Already Getting It Wrong – New York Times
• Jerome Powell's Inflation Legacy for Kevin Warsh – Wall Street Journal Editorial Board
• Bond Markets Are Too Cool About Hot Inflation – Bloomberg
• Steel Tariffs Are Harming Tin Can Makers and Lifting Food Prices – New York Times
• The US Postal Service Is Going Bust. Blame Congress – Wall Street Journal Editorial Board
• The Biggest Flop of Trump's Second Term Costs $1 Million a Pop – Washington Post
• The World's Most Surprising Capitalist Makeover Is Under Way in Sweden – Wall Street Journal