By The US economy expanded at a slower-than-expected pace in the second quarter while inflation remained well above the Federal Reserve’s target, underscoring the difficult balancing act facing policymakers after they opted to keep interest rates unchanged this week.
Gross domestic product, the broadest measure of economic activity, rose at an annualized rate of 1.5% between April and June, according to Commerce Department data released on Thursday.
Economists surveyed by Dow Jones had expected growth of 1.8%, following a 2.1% expansion in the first quarter.
Separate data showed that the personal consumption expenditures price index, the inflation measure most closely watched by the Federal Reserve, declined 0.1% on a monthly basis in June.
This was the weakest reading since April 2020, after climbing 0.5% in May.
However, annual headline inflation remained at 3.7%, in line with market expectations but still significantly above the central bank’s 2% objective.
Core PCE, which excludes volatile food and energy prices and is viewed by many policymakers as a better indicator of underlying inflation trends, increased 0.1% during the month.
The annual core inflation rate stood at 3.3%, matching expectations.
The minor relief in inflation is unlikely to last long, though, as renewed hostilities in the Middle East raise oil prices.
Consumer spending offsets broader weakness
Although overall economic growth slowed, consumer spending remained a key source of resilience.
Household spending, which accounts for more than two-thirds of US economic output, accelerated to a 3.2% annualized pace during the quarter after growing just 0.5% in the January-March period.
The strength in consumption came despite elevated energy prices linked to the ongoing conflict in the Middle East.
Economists said larger tax refunds this year helped cushion households from higher fuel costs, while wealthier consumers continued spending as rising asset prices supported their finances.
Additional support came from President Donald Trump’s “One Big Beautiful Bill,” which boosted disposable income through larger tax refunds.
Spending related to the recently concluded FIFA World Cup and midterm election campaigns also contributed to overall demand.
The GDP estimate was compiled before the release of June’s advance economic indicators, which showed a moderate narrowing in the goods trade deficit and unchanged retail inventories.
That data prompted several economists to revise their GDP forecasts lower, with some cutting estimates to around 1.5%, in line with Thursday’s official reading.
AI investment continues to support the economy
Investment linked to artificial intelligence remained another pillar of growth despite mounting concerns over lofty valuations across the technology sector.
Businesses have continued expanding spending on AI infrastructure, helping sustain domestic investment even as investors increasingly question how quickly companies will generate returns from the massive capital outlays.
Still, economists warned that geopolitical risks remain elevated.
The US-led conflict with Iran, now entering its sixth month, has kept upward pressure on global energy prices and could weigh on consumer demand and business activity later this year if oil prices remain elevated.
The labour market has also helped support the economy.
Employers have added an average of 92,000 jobs a month in 2026, compared with fewer than 10,000 jobs per month during 2025, when higher interest rates and uncertainty surrounding trade policy discouraged hiring.
Inflation remains the Fed’s biggest challenge
The latest data follows the Federal Reserve’s decision on Wednesday to leave its benchmark interest rate unchanged at 3.50% to 3.75%.
The decision was not unanimous, with three policymakers voting in favour of a quarter-percentage-point rate increase, reflecting growing concern that inflation could remain elevated for longer.
Although monthly inflation readings have shown some moderation, higher energy prices continue to cloud the outlook.
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