US GDP Rises 2% in Q1 2026 as Iran War Drives Oil to $126, Pressuring Inflation

US gross domestic product (GDP) accelerated 2% in the first three months of 2026, though consumer spending is slowing as the war with Iran continues to impact energy prices. The last GDP reading for the fourth quarter of 2025 showed that US economic growth slowed to a 0.5% pace, largely due to a contraction in government spending after massive layoffs of federal workers last year. The federal government is down 355,000 workers, or 11.8% of the workforce, since October 2024, according to the Bureau of Labor Statistics. But government spending jumped 10% since last quarter, going from a 5.4% contraction last quarter to a 4.4% increase at the start of 2026. Domestic investment also saw 6.4% growth, what is likely attributed to the surge in spending to boost AI and the infrastructure that supports it. The pace that consumer spending is growing has slowed 0.3% to the fourth quarter of 2025. The war with Iran has soured consumer sentiment and increased inflation expectations, from 3.8% in March to 4.7% in April – the largest one-month increase since April 2025, when Donald Trump announced his “liberation day” tariffs. GDP data is released by the commerce department and measures a country’s spending and investment as a way to gauge economic growth. This is the first reading of GDP and is considered an advance estimate. Two further estimates will be released in coming weeks. The reading only encapsulates one month of the war, which has driven oil and gas prices for the last two months. On Thursday, global oil prices reached a wartime high of $126 a barrel, surging 13% in 24 hours as peace talks between Iran and the US have reached a standstill. The US and Iran have appeared to reach a gridlock over the strait of Hormuz, a key passageway where a fifth of the world’s oil and gas supply would typically pass through. The full impact of higher oil prices on consumer prices have yet to be seen, though recent data showed a nearly 1% jump in annualized inflation in March, to 3.3%. The US defense secretary, Pete Hegseth, testified to Congress about how much the US government has spent on the war with Iran. On Wednesday, Hegseth said the war has cost the US government at least $25bn, though the defense department is asking lawmakers to approve another $1.5tn in military spending. In times of rapidly rising prices, the US Federal Reserve typically steps in with adjustments to the interest rate, which impacts the cost of borrowing money. But the central bank has been in a political bind in recent months, undergoing intense pressure from the Trump administration to lower interest rates, a move that can lead to even higher prices. At a press conference yesterday, Jerome Powell, the outgoing Fed chair, noted that he supports the “hold and wait” strategy the Fed has undertaken to see how both the war with Iran and the impacts of Trump’s new tariffs will have on the economy. A bigger concern, Powell noted on Wednesday, is the Fed’s ability to carry out its duties independently from the White House, saying “the institution is being battered over these things”.