U.S. Economy Grew 2 Percent in First Quarter, Inflation Reaccelerated

The economy expanded at a 2 percent annual pace in the first quarter even as inflation surged back toward levels that keep household budgets under strain. The latest government figures show an economy that was still growing, but one where higher prices threatened to swallow much of the gain.

The U.S. Bureau of Economic Analysis said real gross domestic product rose at an annual rate of 2.0 percent in the first three months of 2026, a sharp pickup from 0.5 percent in the fourth quarter of 2025. Growth was powered by investment, exports, consumer spending and government spending, while imports also rose and reduced the GDP calculation. The agency said the acceleration reflected stronger government outlays, a gain in exports and a faster pace of investment, partly offset by slower consumer spending.

A closer measure of private demand also improved. Real final sales to private domestic purchasers rose 2.5 percent, up from 1.8 percent in the prior quarter, a sign that underlying demand remained firmer than the headline GDP number alone suggested. But the price data told a less reassuring story.

Inflation reaccelerated sharply in the quarter. The PCE price index rose 4.5 percent, while core PCE, which strips out food and energy, climbed 4.3 percent. The GDP price index increased 3.6 percent. All three readings sat well above the Federal Reserve’s 2 percent target and marked a clear step up from the fourth quarter, when the PCE index rose 2.9 percent and core PCE increased 2.7 percent.

The Federal Reserve held its benchmark rate at 3.50 percent to 3.75 percent on April 29 and said inflation remained elevated in part because of higher global energy prices. Policymakers also pointed to developments in the Middle East as a source of fresh economic uncertainty, underscoring how quickly energy shocks can bleed into broader price pressures.

The numbers came as many economists were looking for a rebound after the federal shutdown, with business investment lifted by a data-center spending boom tied to artificial intelligence. But consumer spending had already been losing momentum, and gasoline prices had climbed above $4 a gallon, adding another layer of pressure for households that are still paying more while the economy grows at a respectable pace.

The International Monetary Fund projected 2.4 percent U.S. growth in 2026 and said core PCE inflation should return to 2 percent in the first half of 2027. For now, though, the first-quarter data captured the central tension in the economy: growth was still positive, but so were the prices that keep it from feeling like relief.