US Economy Grows Two Percent in Early 2026 Despite Iran War Fuel Price Surge
The United States economy registered a two percent annualised growth rate in the first quarter of 2026, according to official statistics. This expansion occurred despite the protracted conflict in Iran, which has now entered its third month, significantly impacting global energy markets and driving up the cost of living for American households.
Economic Performance Amidst Conflict
The economic growth, a boost after a slowdown in late 2025, was primarily attributed to substantial investment by technology giants in artificial intelligence (AI) infrastructure. 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 spending shows signs of cooling.
However, the war in Iran has had demonstrable economic consequences. US strikes on Iran and the subsequent closure of the Strait of Hormuz propelled Brent crude oil prices to a four-year high of USD#126 per barrel. Although prices have since receded to USD#111, this represents a significant increase from the USD#73 pre-war level in February. Consequently, Americans paid USD#4.30 per gallon for fuel by April's end, a sharp rise from under USD#3 in February.
This surge in energy costs contributed to a sharp increase in inflation, with March's annual price increase reaching 3.3 percent, a near two-year high. This inflationary pressure has led the Federal Reserve to maintain its base interest rate at 3.5 percent to 3.75 percent, effectively dashing hopes for imminent rate cuts that were widely expected before the conflict.
Impact on Borrowing and Investment
The average interest rate for a 30-year mortgage has climbed from 5.98 percent to 6.3 percent since the beginning of US military action in Iran. Samuel Tombs, chief US economist at Pantheon Macroeconomics, suggested that sustained high oil prices and expectations of a prolonged US blockade of Iranian ports could delay any interest rate reductions until 2027.
Conversely, major US stock indices have performed strongly during the conflict. The Nasdaq has gained approximately 10 percent, the S&P 500 is up around 5 percent, and the Dow Jones Industrial Average has risen by just over 1 percent, benefiting investors and pension holders with stock market exposure.
With midterm elections approaching in November, the economic narrative will be pivotal. While headline GDP growth and robust stock market performance offer some political comfort, the persistent rise in the cost of living, particularly fuel and groceries, remains a considerable concern for American voters.
