US Economy Grows 2% in Q1 2026 as Iran War Drives Oil to $126, Halting Rate Cuts
The US economy recorded a 2% annualised growth in the first quarter of 2026, according to official statistics. This expansion occurred despite the persistent economic fallout from the US-Israeli war in Iran, which has now extended into its third month.
Donald Trump had initially projected the conflict would conclude within six weeks, yet its continuation has instigated a global energy shock reminiscent of the 1970s oil crises. This has driven up the cost of petrol and groceries, placing additional strain on American households.
Economists attribute the overall growth largely to substantial investment by technology giants in artificial intelligence, offsetting a cooling in consumer spending. James Knightley, chief international economist at ING, noted that “investment linked to tech and AI has clearly become the main engine of growth in the US” as consumer expenditure moderates.
However, the war's impact on living costs remains a critical concern for voters ahead of November's midterm elections. US strikes on Iran and the subsequent closure of the Strait of Hormuz propelled Brent crude to a four-year high of $126 per barrel, a significant increase from $73 before the conflict began in late February. This surge led to US petrol prices reaching $4.30 per gallon by the end of April, up from under $3 in February.
Inflation subsequently jumped, with March's annual price increase reaching 3.3%, a near two-year high. This figure extinguished any prospects of imminent interest rate cuts from the Federal Reserve, which maintained its base rate at 3.5% to 3.75%. The average rate for a 30-year mortgage has since climbed from 5.98% to 6.3%.
Samuel Tombs, chief US economist at Pantheon Macroeconomics, suggests that sustained high oil prices and the ongoing US blockade of Iranian ports could delay rate cuts until 2027.
Conversely, major US stock indices, including the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, have recovered early war losses, with the Nasdaq gaining approximately 10% since the conflict began. While positive for investors and pension holders, these market gains do little to alleviate the burden of spiralling living costs for most Americans.
