Economists with Cal State Fullerton say local and U.S. economies will see inflation rise as they absorb the ongoing supply shock from rising fuel costs caused by the Iran war, further cooling the already frigid homebuying market.

On Thursday, April 30, economists Anil Puri and Mira Farka revised their predictions for the year, writing in a semi-annual report that they expect inflation to climb into “the high-3s,” up from the previously anticipated 3.5% in the year’s first three months.

Puri told the Southern California News Group that he expects housing sales to slow in Orange County, especially if mortgage rates stay above 6%.

Also see: California homebuying falls below Great Recession lows

“Housing prices went up so much in the last few years, but they seem to have taken a little breather now,” Puri said. “Housing prices are under stress. We see only moderate improvement in housing in 2026.”

The theme throughout the 71-page report was a slowing economy that is dealing with higher fuel costs as a result of tighter crude oil supplies flowing through the Strait of Hormuz. About 20% of the world’s oil supplies pass through the shipping route.

The economists also wrote that growth in the U.S. is expected to slow to the “low-2s in the middle of the year” with the outlook for the fourth quarter and beyond appearing “brighter.” That prediction is already hitting the mark. The federal government’s Bureau of Economic Analysis said April 30 that GDP expanded at 2% rate in the first quarter.

“The U.S. economy is very well insulated and is coming out of the war with fewer bruises,” Farka told SCNG. “I know this is cold comfort with a lot of people hurting who are paying $7 or $8 gas prices, but there are a lot of cushions to lessen the impacts. U.S. consumers are still hanging strong.”

One such cushion are tax cuts from last year’s One Big Beautiful Bill Act, designed to boost consumer spending — money that now seems to be paying for those higher fuel costs, Farka said.

The annual inflation rate for 2025 was 2.7% versus 2.9% the year before. Inflation has edged higher from 2.4% in the first two months of 2026 to 3.3% in March — a month after the Feb. 28 war was launched by the U.S. and Israel against Iran. Growth in the economy was tepid last year, coming in at 2.1%, with a forecast by the economists made last fall of 2.4% for 2026.

The 2-month-old Iran war pushed the average price of gas in California to $6.060 a gallon on Friday, up 30% from $4.674 a gallon on the day after the war began, according to AAA Fuel Prices. In Orange County, the average price for regular gas reached $6.12 per gallon. Nationally, gas prices shot up 41% to $4.392 a gallon from $3.11 over the same period.

Local highlights

Business sentiment: The Woods Center index of Orange County business sentiment — based on a quarterly survey of Orange County executives — shows “modest improvement” in business sentiment in both national and regional economies heading into the 2026 second quarter. The Iran war was ongoing in the second half of March when the survey was administered.

According to the survey, 29.2% of executives expect industry activity to improve — more than double the 13% reported in the previous quarter.  At the same time, the share anticipating a downturn declined to 24.6%, down from 31%.

Inflation: Overall, more than two thirds of respondents expect inflation to remain below 3% by year-end. Specifically, 26.1% of respondents expect inflation to come in below 2.5%, while 40% anticipate a range of 2.5% to 3%. Another 20% place inflation between 3% and 3.5%. Only 7.7% expect a range of 3.5% to 4%, and just 6.2% foresee inflation exceeding 4%.

Iran war impact: Survey respondents were asked to assess the impact of the ongoing conflict with Iran on their businesses.  A majority — 55.4% — reported no direct effects. But the early signs of pressure are evident. Roughly one-quarter of respondents cited shifts in demand for their products, while a similar share pointed to rising transportation costs driven by higher fuel prices.

Additionally, 9.2% reported supply chain disruptions, and an equal share noted that elevated energy costs are beginning to weigh on operations.