US Economy Expands 2% in Q1 2026 as Inflation Rises to 3.2%
The U.S. economy grew at a 2% annual rate in the first quarter of 2026, driven by government spending and investment, but inflation climbed to 3.2%—above the Federal Reserve's target. The expansion comes as energy prices surge due to the Iran war, clouding the economic outlook.
Economic Growth Rebounds
Real gross domestic product (GDP) increased at an annual rate of 2.0 percent in the first quarter of 2026 (January, February, and March), according to the advance estimate released today by the U.S. Bureau of Economic Analysis. The U.S. economy expanded at an annual rate of 2% in the first three months of 2026, slower than forecasters expected but a rebound from weak growth in the previous quarter. Economists polled by FactSet had projected the nation's gross domestic product—the total value of goods and services produced in the U.S.—to rise at an annualized rate of 2.2% for the January to March quarter.
Drivers of Growth
The contributors to the increase in real GDP in the first quarter were investment, exports, consumer spending, and government spending. The core of the economy remained solid in Q1, driven by the AI buildout and the tax cuts beginning to feed through. Those factors will continue to drive growth over the rest of the year, but the jump in energy prices will take some of the shine off what would otherwise have been a strong year for the economy.
Rising Inflation Concerns
Another economic indicator, the Personal Consumption Expenditures Price Index, was also released Thursday, showing inflation increased at a 3.2% annual rate, above the Federal Reserve's target of 2%. On Thursday, the average cost for a gallon of gasoline hit $4.30, the highest level since July 2022, while Brent crude, the international benchmark, topped $126, a wartime high.
War Impact on Outlook
EY-Parthenon chief economist Gregory Daco projected the war could drag GDP down by 0.3 percentage points this year. He estimates GDP will grow by 1.8% for the entire year, which would be a slowdown from 2025, when GDP increased 2.1% on an annual basis.