WASHINGTON — The U.S. economy grew at a 2% annual rate in the first quarter of 2026 even as inflation accelerated to its fastest pace in nearly three years, the Commerce Department reported on April 30. The Personal Consumption Expenditures price index rose 0.7% from February to March and 3.5% from a year earlier, the largest year-over-year gain since May 2023.

Gasoline prices increased 21% in March compared to February after Iran closed the Strait of Hormuz in response to U.S. and Israeli attacks, causing the largest disruption of oil supplies in history. The average price for a gallon of regular gasoline rose by 7 cents overnight to $4.30, up from $3.18 on the same date in 2025, and set new multi-year highs in each of the three days preceding April 30.

Prices outgrew American incomes, including wages, business income and government benefits, for the second consecutive month in March. Consumer spending, which accounted for 70% of U.S. economic activity, expanded at a 1.6% annual rate from January through March, supported by large tax refunds tied to President Donald Trump's 2025 tax cuts.

Michael Pearce, chief U.S. economist at Oxford Economics, said: "Rising tax refunds were outpacing the increased burden of gasoline spending two to one in March and most of April. With tax refund season winding down and gas prices still climbing, the hit to consumer spending will become more evident from May."

Excluding housing, business investment rose 10.4% in the first quarter of 2026, the largest increase in nearly three years. The first-quarter expansion followed 0.5% annualized growth in the October through December 2025 quarter, a period during which a 43-day federal government shutdown reduced GDP growth by more than one percentage point.

Joe Brusuelas downgraded his forecast for U.S. economic growth in 2026 to 1.7% from 2.4%. "A year that was set to benefit from tailwinds associated with a large tax cut and boom in artificial intelligence-led investment has been partially derailed by the impact of what as of today is an adverse and growing supply shock caused by the war in Iran," Brusuelas said. "Unfortunately, war and the supply shock that ensued has altered the probable growth path this year."

The Federal Reserve, the Bank of Japan and the European Central Bank left interest rates unchanged as they assessed the economic fallout from the conflict. The Bank of England kept its main interest rate on hold at 3.75% on Thursday and indicated it may raise rates as it assesses the impact of the war in Iran.

The number of Americans applying for unemployment benefits declined to the lowest level in more than 50 years last week. Employers added 160,000 jobs in January 2026, eliminated 133,000 jobs in February, and added 178,000 jobs in March. Job growth in 2025 was the weakest outside of a recession since 2002.