US Economy Keeps Growing at 2% Pace, but Rising Oil Prices from Iran Conflict Start to Bite

With input from the New York Times, Axios, CBS News, the Guardian, the Washington Post, and the Financial Times.

The US economy entered 2026 with more momentum than expected, even as the first shocks from the Iran conflict began rippling through energy markets.

Fresh data from the Commerce Department shows gross domestic product grew at a 2% annual rate in the first quarter. Not spectacular, but solid – especially compared to the sluggish 0.5% pace at the end of 2025, when a government shutdown dragged on activity.

That headline number, though, comes with a catch. It only captures the early phase of the war in Iran, when oil prices had just started climbing. The real impact may still be building.

For now, the core of the economy is holding up.

Consumer spending, which makes up the bulk of US economic activity, rose 1.6% during the quarter. That’s a step down from late last year but still better than many expected given souring sentiment and higher costs at the pump. Spending strength has been uneven, with higher-income households doing most of the heavy lifting.

Business investment added another layer of support. Companies continue pouring money into artificial intelligence infrastructure – everything from data centers to advanced computing equipment – and that spending is showing up clearly in the numbers. Investment in tech and software made a sizable contribution to overall growth.

A broader measure of private-sector demand, combining consumer spending and business investment, climbed 2.5%, an improvement from the previous quarter. Strip out government swings and inventories, and the underlying picture still looks relatively firm.

Even so, there are early signs of strain.

Energy prices have surged since the conflict began, driven in part by disruptions around the Strait of Hormuz, a critical artery for global oil supply. Brent crude has jumped dramatically from prewar levels, and gasoline prices in the US have followed, moving well above $4 a gallon.

That kind of spike tends to act like a tax on consumers. More money spent on fuel leaves less for everything else, and economists expect that dynamic to weigh on growth in the coming months if prices stay elevated.

There’s already some evidence of that pressure feeding through. Inflation accelerated in March, with the Fed’s preferred gauge rising 0.7% for the month and 3.5% from a year earlier. Core inflation remains stubbornly high as well, running above 3%.

For policymakers, it’s a tricky setup. Growth is steady, the labor market is tight, but inflation is drifting further from target – and now energy costs are adding another layer of uncertainty.

The Federal Reserve opted to hold interest rates steady this week, signaling a wait-and-see approach as it gauges how much of the oil shock sticks. Officials are wary of reacting too quickly, especially with inflation already running above target for years.

Markets, for now, are taking it in stride. Stocks remain near record levels, buoyed by strong corporate earnings and continued optimism around AI-driven growth.

Still, the outlook hinges on one big question: how long energy prices stay elevated. If the conflict drags on and oil remains expensive, what looks like a resilient economy today could face a more difficult stretch later this year.