CBO publication page for letter 62756

… <section class="summary"> <header role="button" class="head-section" aria-expanded="false" aria-controls="content-panel"><h2>Summary</h2></header> <div class="content" id="content-panel" aria-hidden="true"> <article> <div class="clearfix text-formatted field field--name-body field--type-text-with-summary field--label-hidden field__item"><p>CBO was asked to estimate the cost of U.S. combat operations against Iran that began this past February as Operation Epic Fury. Specifically, the agency was asked to focus on four categories of costs associated with the armed conflict: the Department of Defense's (DoD's) operational, logistical, and sustainment costs; DoD's opportunity costs; costs associated with increased prices as a result of economic disruption; and potential additional costs, such as those associated with diplomatic operations and foreign aid.</p><h3>Summary of CBO's Findings</h3><p>The estimates that CBO was asked to produce for each category of costs are the result of separate analyses that reflect disparate data, methods, time periods, and magnitudes of uncertainty. Thus, the estimates for each category are not directly comparable or summable. Moreover, CBO's estimates of costs in those various categories are qualitatively different. For example, estimates of the cost of expended munitions are directly tied to events that have transpired, whereas estimates of the long-term economic and budgetary impact of the conflict reflect fiscal effects that have yet to unfold.</p><p><strong>DoD's Operational, Logistical, and Sustainment Costs.</strong> CBO estimates that as of August 1, 2026, the armed conflict with Iran has cost DoD approximately $38 billion. That amount reflects the costs of replacing expended munitions and equipment lost in battle, increased flying hours, other operations, and increased fuel costs. It also reflects that the initial, intense phase of the conflict lasted just over a month (less intense combat operations are still ongoing) and that relatively few U.S. forces have been involved compared with the much larger and longer U.S. operations in Iraq and Afghanistan. CBO's estimate does not include costs borne by other parts of the federal government, such as the increased cost of fuel used by the Postal Service. Nor does it include costs already accounted for in the federal budget, such as the basic operating costs of the military forces involved in the conflict.</p><p>As the conflict persists, DoD's costs will continue to increase—slowly if the level of violence remains low and sporadic (as it did in May and June) and rapidly if the intensity of the conflict escalates (as it did in July). CBO estimates that if the level of violence remained as low as it was in May and June, an additional month of conflict would cost $2 billion; if the intensity of the conflict increased to roughly the level experienced in July, the cost per month would increase to $3 billion. Monthly costs could be higher still if the violence escalated further.</p><p>To estimate DoD's costs, CBO relied on government databases and public reports because DoD did not respond to CBO's requests for information. As a result, CBO's estimates are subject to considerable uncertainty. This past June, the Administration requested $87.6 billion in supplemental appropriations, of which $67.1 billion was for DoD to pay for the conflict. The portion of that request that appears to be directly related to the conflict, $42.3 billion, is about 10 percent larger than CBO's estimate of DoD's costs.</p><p><strong>DoD's Opportunity Costs.</strong> For DoD, the main opportunity cost of the conflict thus far has been the large expenditure of missile defense interceptors, which will leave the United States with a reduced inventory of interceptors for several years. The shortfall would become especially problematic if a conflict arose with an opponent whose arsenal included large numbers of ballistic and cruise missiles. (The People's Republic of China, PRC, maintains such an arsenal, which would probably play a major role in a military conflict involving Taiwan.)</p><p><strong>Economic and Budgetary Effects.</strong> CBO estimates that the main economic impact of the conflict with Iran consists of inflationary pressures caused by the reduction in shipments of oil and natural gas through the Strait of Hormuz and disruptions to shipping through the Red Sea (which have intensified since CBO completed the analysis underlying this letter). That reduction has increased energy prices globally. In addition to raising crude oil prices, the conflict has disrupted global refining activities and, consequently, increased the prices of refined petroleum products such as gasoline, diesel fuel, and jet fuel. Petroleum is a component of the bundle of goods and services that all Americans purchase. Because the price of almost every product reflects shipping costs, increases in petroleum prices—a significant input in transporting goods—indirectly affect the prices of most goods and services.</p><p>In CBO's assessment, the effects of those higher energy prices will put upward pressure on consumer prices. As a result, in the first quarter of 2027, inflation (measured year over year) in the price index for personal consumption expenditures (PCE) is now estimated to be 0.5 percentage points higher than the agency projected in February 2026, and core PCE inflation is estimated to be 0.3 percentage points higher than previously projected. (The core PCE price index excludes prices for food and energy.)</p><p>In CBO's baseline projections, the paths of overall and core PCE inflation differ: Overall PCE inflation reflects the direct effect of increased energy prices, which, in CBO's estimation, added 2.3 percentage points to the annualized rate of inflation in the second quarter of 2026. (PCE inflation in that quarter was 5.3 percent.) As energy prices decline, that effect diminishes in subsequent quarters in relation to CBO's projections. The conflict has affected core PCE inflation more gradually than it has affected overall inflation. But in CBO's estimation, core PCE inflation will remain elevated longer because higher energy prices take longer to affect prices of nonenergy goods and services than they do the price of gasoline or other energy-related products.</p><p>The agency estimates that the higher rates of inflation attributable to the conflict will boost interest rates on Treasury securities. In CBO's assessment, interest rates on 3-month Treasury bills are nearly 0.2 percentage points higher in 2026 than the agency estimated this past February. By the first half of 2027, such rates are less than 0.1 percentage point higher than previously estimated.</p><p>Those higher rates of inflation and higher interest rates are estimated to have modest effects on CBO's projections of federal revenues and spending. Moreover, those effects would be roughly offsetting. On the one hand, higher inflation would boost revenues. On the other hand, higher interest rates and higher inflation would increase net outlays for interest and outlays for mandatory spending programs, and CBO's baseline projections of discretionary spending would increase if wages and prices in the economy were higher.</p><p><strong>Potential Additional Costs.</strong> CBO was unable to estimate potential additional costs of the conflict associated with diplomatic operations and foreign aid, for example. Such costs would be diffuse and would depend on the outcome of the conflict.</p></div> …