U.S. Economy Expands 2.0% in Q1 2026 as Inflation Remains Elevated

The U.S. economy grew at a 2.0% annualized rate in the first quarter of 2026, accelerating from a 0.5% pace in the final three months of 2025, while a closely watched government report also showed inflation running at elevated levels that keep the data central to the Federal Reserve’s policy outlook.

The U.S. Bureau of Economic Analysis said in its advance estimate released Wednesday that “Real gross domestic product (GDP) increased at an annual rate of 2.0 percent in the first quarter of 2026 (January, February, and March), according to the advance estimate released today by the U.S. Bureau of Economic Analysis.” The figure will be revised, with the agency’s second estimate due May 28.

The pickup in growth reflected contributions from investment, exports, consumer spending and government spending, the BEA said. Imports also increased, which subtracts from GDP. A key measure of underlying domestic demand, real final sales to private domestic purchasers — which combines consumer spending and private fixed investment and strips out inventories, trade and government — rose 2.5% in the quarter, up from 1.8% in the fourth quarter.

The same report pointed to firm price pressures. The gross domestic purchases price index increased at a 3.6% annual rate in the first quarter. The personal consumption expenditures price index, or PCE, rose 4.5%, while the core PCE price index excluding food and energy increased 4.3%. Current-dollar GDP, which is not adjusted for inflation, rose 5.6%.

Those inflation readings matter because PCE is the Federal Reserve’s preferred gauge for tracking price pressures. At its March 18 meeting, the central bank held its benchmark interest-rate target unchanged. “The Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent,” the Fed said at the time, while also saying inflation remained elevated. For broader context, the BEA previously reported that real GDP grew 2.1% in full-year 2025, suggesting the first-quarter pace was stronger than the prior quarter but still broadly consistent with recent trend growth. The labor market has also remained relatively steady, with nonfarm payrolls increasing by 178,000 in March and the unemployment rate at 4.3%, according to the Labor Department.

Within the quarter’s details, investment gains came from equipment, intellectual property products including software, and private inventory investment, partly offset by declines in residential and nonresidential structures. Consumer spending was driven mainly by services, led by health care, including hospital, nursing home and outpatient services. Government spending was led by federal nondefense spending, mainly federal employee compensation, after a fourth-quarter decline tied to the government shutdown, making part of the rebound a timing effect. On trade, both exports and imports rose, mainly in goods led by computers, peripherals and parts. The BEA also noted accounting adjustments involving silver bars and refunds tied to certain tariffs, but said the tariff refunds did not affect first-quarter GDP. The 2.0% reading was above the Atlanta Federal Reserve’s last GDPNow estimate of roughly 1.2%.