The US economy expanded at a moderate pace in the first quarter of 2026, supported by investment and government spending. At the same time, inflation picked up, driven in part by higher energy prices linked to geopolitical tensions. This combination of steady growth and rising prices is drawing attention from policymakers and economists, as underlying weaknesses in consumer activity and income growth begin to surface.
Investment and Government Spending Underpin Growth
Gross domestic product increased at an annual rate of 2.0% between January and March, rebounding from 0.5% in the final quarter of 2025, according to data released by the Commerce Department and reported across multiple outlets. The improvement reflects a recovery from disruptions linked to a prolonged government shutdown late last year.
Business investment played a central role in supporting activity. Spending on equipment rose by more than17% compared with the previous quarter, while continued investment in artificial intelligence infrastructure contributed significantly to overall growth. According to reporting by The Washington Post, roughly half of the increase in a key measure of domestic demand was tied to computer and software purchases linked to AI development.
Government spending also increased, particularly at the federal level, helping to lift the headline GDP figure. According to AFP, this rebound in public expenditure followed a contraction during the shutdown period, making it a notable factor in the quarter’s recovery.
Exports contributed positively, although rising imports partially offset gains. Businesses increased imports after a Supreme Court ruling in February invalidated much of the previous tariff framework, leading to a widening trade deficit. According to the US Census Bureau figures cited in The Washington Post, the merchandise trade gap reached $87.9 billion in March.
Despite these supports, growth fell short of expectations. Economists had anticipated a 2.2% expansion, and some analysts note that the current pace remains below estimates of the economy’s long-term potential.
Inflation Pressures Build as Consumers Show Signs of Strain
Inflation accelerated during the same period, with the Personal Consumption Expenditures index rising 3.5% year-on-year in March, according to Commerce Department data cited by AFP and The New York Times. Core inflation, which excludes food and energy, reached 3.2%, remaining above the Federal Reserve’s 2% target.
Energy prices were a key driver. The escalation of conflict involving Iran disrupted flows through the Strait of Hormuz, pushing fuel costs higher. According to AAA data referenced in multiple reports, average US gasoline prices climbed to$4.30 per gallon, the highest level in four years.
These price increases are beginning to weigh on households. Consumer spending rose by just 1.6% in the first quarter, a slower pace than in previous periods. According to AFP, analysts described this as a warning sign, particularly as higher fuel costs absorb a significant portion of household income.
There are further indications of pressure. Inflation-adjusted personal income has declined in consecutive months, and some households have relied on tax refunds or savings to maintain spending levels. According to The Washington Post, economists expect consumption to weaken in the coming months as these temporary supports fade.
At the same time, the labour market remains relatively stable but subdued, with limited hiring activity. Consumer sentiment has also fallen to historically low levels, reflecting concerns about rising costs and economic uncertainty. The overall picture is one of resilience, though unevenly distributed. Growth continues, supported by investment and higher-income spending, while inflation and energy costs pose increasing challenges for broader economic stability.
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