U.S. Economy Grew 2% in Q1 as Iran War Clouds Inflation Outlook
The U.S. economy expanded at a 2% annualized pace in the first quarter of 2026, rebounding from weak prior growth, but inflation pressures intensified as the Iran war sent energy prices skyrocketing. The Fed held interest rates steady amid heightened uncertainty.
Q1 GDP Growth
Real GDP increased at an annual rate of 2.0 percent in the first quarter of 2026, with contributors being investment, exports, consumer spending, and government spending. The economy expanded slower than forecasters expected, but marked a rebound from weak growth in the previous quarter, with economists having projected 2.2% growth.
Inflation Surge from Energy Crisis
The Iran war sent energy prices skyrocketing due to a slowdown of traffic in the Strait of Hormuz, with gasoline hitting $4.30 per gallon and Brent crude topping $126 on Thursday. Inflation increased at a 3.2% annual rate per the Personal Consumption Expenditures Price Index, above the Federal Reserve's 2% target.
Fed Response and Growth Outlook
The Federal Open Market Committee maintained the federal funds rate at 3.5% to 3.75%, though the decision showed a divide with an 8-4 vote. EY-Parthenon chief economist projected the war could drag GDP down by 0.3 percentage points this year, with GDP estimated to grow 1.8% for 2026 versus 2.1% in 2025.