CBO prices Iran combat at $38.1 billion and 0.5 percentage point on 2027 inflation

The Congressional Budget Office on Tuesday said restoring the Defense Department's interceptor inventory after combat operations against Iran would probably take at least five years, even if production increased. That clock sits next to a combat bill of $38.1 billion through August 1 and a run rate of $2 billion to $3 billion a month, higher if fighting escalates. Nothing in that monthly pace prices the production hole.

CBO also said the war would add 0.5 percentage point to first-quarter 2027 inflation in the price index for personal consumption expenditures, the Fed's preferred gauge, driven largely by higher energy prices from supply disruptions in the Strait of Hormuz and the Red Sea. Wednesday is the first time since June that the Fed has to write 2027 down with the war still on the page.

What CBO counted, and left out

Replacing munitions expended through August 1 is the largest piece CBO published: $21.7 billion, including $13.1 billion for missile-defense interceptors, $7.3 billion for land-attack cruise missiles, and $1.2 billion for other munitions. Increased flying hours were put at $10.4 billion and higher fuel costs at $2.7 billion. Those category figures were reported separately; they are not a second total.

The $38.1 billion is not a full war bill. CBO excluded already-budgeted operating costs of the forces involved, repairs to damaged U.S. facilities, costs borne by other agencies, and additional interest the government would pay on the borrowing. It did not include events after August 1. The Defense Department did not provide the information CBO requested; the office built the estimates from government databases and public reports and said they are subject to considerable uncertainty.

The total sits close to the $37.5 billion Defense Secretary Pete Hegseth gave the Senate on July 21. Hegseth's figure included costs already incurred plus amounts anticipated through September 30. CBO's through-August-1 accounting is already in that neighborhood.

CBO's Monthly Budget Review, published September 9, put the federal deficit at $2.0 trillion for the first 11 months of fiscal 2026. That comparison is distorted by payment-timing shifts; absent them, CBO said, the deficit would have been $82 billion larger than the same stretch a year earlier. The combat bill is a thin slice of a shortfall the market already funds.

The 0.5 percentage point that meets the Fed

The inflation add-on is a quarterly rate effect against CBO's February baseline, not a new calendar-year forecast, and not a statement about the price level after that quarter. Brent crude was at $108.70 a barrel toward 2:45 p.m. Eastern, up 2.9% on the session. Producer prices already show goods running ahead of services: the Bureau of Labor Statistics said August final-demand prices rose 0.4% on the month and 5.4% from a year earlier, with goods up 1.1% and services up 0.1%. The New York Fed's September Empire State survey, from responses collected September 2 through 10, put the prices-paid index at 63.1, edging above the four-year high of 62.6 it reached in May. The University of Michigan's preliminary September survey put one-year inflation expectations at 4.6%, up from 4.0% in August and back to June's reading.

Those prints are the incoming inflation file the add-on lands on. The FOMC meets Tuesday and Wednesday with a new Summary of Economic Projections. In June the median participant put PCE inflation at 3.6% for 2026 and 2.3% for 2027. CBO's first-quarter add-on does not tell you what those medians have to print. A one-quarter energy effect can sit inside an unchanged calendar-year number if later quarters cool.

Five years of interceptors, and the funds that hold the makers

The replenishment clock is a production story, not a one-year budget-authority story. Lockheed Martin, which builds the THAAD ballistic-missile interceptor, said in January it would raise output from 96 a year to 400, a ramp it described as taking seven years. An August analysis by the Center for Strategic and International Studies, reading the Pentagon's delivery projections, said the Army's fiscal 2027 request for 857 THAAD interceptors would not start arriving until mid-2029 and would finish replacing Iran-war usage only at the end of that year.

The concentrated way to hold the makers is the iShares U.S. Aerospace & Defense ETF AITA. The equal-weight alternative is the State Street SPDR S&P Aerospace & Defense ETF AXAR. Toward 3 p.m. Eastern, AITA was at $214.66; AXAR was at $241.78. The past month is the sharper fact: AITA is down 15.3%, AXAR 18.6%. The equal-weight fund falling harder says the decline is not just the mega-caps.

RTX, the missile contractor, was little changed on the day. Lockheed Martin was up 0.9%, Northrop Grumman 1.2%, General Dynamics 0.7%. One session is not the replenishment cycle.

Long Treasuries near 52-week lows

Long Treasuries have been marking higher yields for months.

The iShares 20+ Year Treasury Bond ETF BTLT holds Treasuries with remaining maturities above 20 years; it was at $80.72 toward 3 p.m. Eastern, a few cents from its 52-week low. Vanguard Extended Duration Treasury ETF AEDV holds 20- to 30-year Treasury STRIPS, zero-coupon principal strips whose prices move more for a given change in yields. It was at $58.90. The iShares TIPS Bond ETF BTIP holds inflation-protected Treasuries and was at $105.79, on its 52-week low.

The board as of midafternoon Tuesday:

Defense funds have sold off over the past month, and long Treasuries are already near the lows of the past year. Wednesday the Fed will write 2027. CBO said the interceptor rebuild will still be running years after that.