CBO says war in Iran cost the US USD 38bln in first five months, adds that annual PCE inflation projection is now 0.5% higher for Q1 2027

Historically, conflicts funded by deficit issuance have mattered for rates through the supply channel, incremental Treasury borrowing against an already heavy auction calendar, rather than through the headline cost itself. The second element is the one with the cleaner transmission: an upward revision to a projected PCE print from an energy and freight shock is a supply-side impulse, and central banks have tended to distinguish between a one-off level shift in prices and the second-round pass-through into core and expectations, with only the latter altering the policy path. That distinction is the tell here, whether the uplift is characterised as transient or as feeding the stickier components. Watch for follow-on scoring updates, any supplementary appropriation request, and how term premium at the long end behaves relative to front-end repricing, which separates the issuance story from the inflation story. As a fiscal and inflation accounting exercise rather than a policy decision, the signal is directional on both fronts.