In few months, the hostilities in Iran will pass, oil prices will fall back, but the tough challenge of getting to 2% inflation will remain.
President Trump likely won’t get his unconditional surrender.
Without a U.S.-Israeli occupation, Iran could continue as a theocratic state or slip into state entropy and facture along ethnic lines.
Then the U.S. Navy could sanitize the Persian Gulf, and Iran’s 2 million barrels a day could be replaced by U.S. resources.
Prior to the U.S.-Israeli strikes, the economy was in a sweet spot.
After a tough first quarter in 2025, GDP growth returned to the 2.5% pace accomplished during the prior eight years.
In January, the Consumer Price Index was up just 2.4%. Removing volatile food and energy prices, core inflation was 2.5% and trending down.
Still, getting to the Federal Reserve’s 2% target would have been tough even with stable oil prices, because of the remaining effects of tariffs, stressed labor markets and rising health care costs.
Foreign suppliers aren’t absorbing the bulk of the tariffs as Mr. Trump predicted. They’re finding new customers elsewhere and aren’t slashing prices for U.S. buyers to keep factories humming.
Studies from the New York Federal Reserve Bank, Germany’s Keil Institute for the World Economy and elsewhere indicate U.S. importers and consumers have absorbed about 90% of the tariffs.
Faced by strapped consumers last year, wholesalers and retailers couldn’t push all the tariffs paid into retail prices. Now, businesses like Levi Strauss, McCormick Spices and Toyota are poised to boost prices on clothing, common household products and big-ticket durable goods.
Steep increases in employer contributions to health insurance and wage pressures where workers are in short supply, as in manufacturing, the building trades and health care are also becoming too much to absorb.
The latter appears paradoxical when the unemployed face long job searches, but labor markets are often tight where businesses are responding to surging demand.
The recent abatement in core goods inflation has been assisted by a drop in used car prices but that won’t continue with new car prices rising.
Prior to COVID, core goods prices were stagnant or falling, and inflation was largely a story about housing, health care and other services but goods prices are now rising about 1% a year.
Services, which account for three quarters of core inflation, continue to run hot at 3% and put overall inflation stubbornly above 2%.
In January and February, the economy added an average of 17,000 jobs a month after accomplishing only 9,700 a month in 2025. And those gains are largely concentrated in health care.
Employers are pruning where specific tasks can be performed by Artificial Intelligents Agents and adding staff only where they must. Walmart still needs more drivers to deliver more online sales.
With tougher deportation and legal immigration policies, net in migration could soon hit zero. Indigenous labor force growth can support only about 24,000 new jobs a month.
About 81% of the prime working age population—those between the ages 25 to 54—are employed. That’s near its 82% 2000 peak.
As rapidly expanding activities like health care and data centers add employees, the rest of the economy must shed workers or get along with few additions.
AI is both tyrant and savior. Potentially, it enables a precision dance that reallocates a virtually fixed supply of workers outside health care to accomplish a still strong pace of productivity and GDP growth.
AI is not destroying whole occupations, rather it is reorganizing tasks within workplaces.
Whole job categories like coders and accountants are not disappearing. Individual workers must learn to use AI to scale their productivity—often at their own initiative—or workers at neighboring desks assisted by AI Agents will displace them.
Many businesses are simply putting the Agents on desks and telling workers to improvise.
Authentic Brands, which owns Reebok and Champion, is giving employees that review legal documents Anthropic’s new AI tool, but telling them to continue using incumbent software and methods as they experiment.
In such environments, self-starters will supercharge their productivity, whereas employees that coast along will become obsolete and fall into the abyss of long-term white collar unemployment.
One quarter of jobs seekers have been out of work for more than six months because in no small measure, it’s tough to get those new skills once outside the laboratory for AI adaptation that workplaces provide.
At 4.4%, the unemployment rate is within the range economists consider full employment, but it averaged 3.5% during the first half of 2023.
It’s creeped up, because we aren’t channeling enough young people into training for non-college degree occupations and haven’t devised meaningful reskilling strategies for the mid-career white collar unemployed stuck outside the laboratory.
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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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