Key Takeaways

• GDP rebound: First-quarter GDP rose to 2%, up sharply from 0.5% in Q4 2026 — though just shy of the 2.2% forecast.
• Shutdown distortion: Last year’s 43-day government shutdown caused the biggest federal spending drop since 1972, skewing prior comparisons.
• AI data center boom: Rapid expansion to support artificial intelligence has been a key growth pillar, offsetting cooling consumer spending.
• Gasoline pain: Pump prices have surged above $4 a gallon since the U.S.-Israel campaign against Iran began in late February.
• Hormuz still closed: The waterway carrying a fifth of global oil flows remains effectively shut down, fueling the energy shock.
• Core PCE runs hot: Q1 core PCE prices jumped to 4.3% — well above 2.7% in Q4 and the 4.1% expected — described by CIBC as “uncomfortably hot.”
• March PCE accelerates: Headline PCE hit 3.5% year-on-year, with core PCE rising to 3.2% from 3.0% in February.
• Dollar as safe haven: America’s status as a major energy exporter has bolstered the greenback during the crisis.
• Consumer headwinds: CIBC analysts warn of a “further slowdown ahead” as households grapple with elevated gasoline prices.

The pace of U.S. economic growth accelerated in the first quarter, rebounding from tepid activity in the prior three-month period when output was depressed by a government shutdown, while inflation climbed in March amid a sharp rise in energy prices stemming from the war in Iran.

Gross domestic product in the January to March period came in at 2%, up from 0.5% in the final quarter of 2026 but slightly below economists’ projections of 2.2%, according to an advance estimate from the Bureau of Economic Analysis released on Thursday.

Analysts have noted that the GDP data was likely skewed by the fourth quarter, when growth slowed dramatically because of last year’s 43-day government shutdown — which triggered the steepest drop in federal spending since 1972.

Government Spending Bounces Back, But Patterns Remain Distorted

In the first quarter, government spending was lifted by an uptick in nondefense outlays — primarily federal employee compensation — although the BEA flagged that “the pattern of spending” was affected by the shutdown.

The rapid expansion of data centers to support artificial intelligence has helped underpin growth and offset a slowdown in consumer spending, which has been fading since the outbreak of the Iran war in late February.

Gasoline pump prices have rocketed to above $4 a gallon, reflecting the surge in energy costs since the United States and Israel launched their joint assault on Iran in late February. The critical Strait of Hormuz — a vital waterway south of Iran through which one-fifth of the world’s oil flows — has been effectively closed for weeks.

“[W]e expect a further slowdown [in consumption] ahead as consumers grapple with higher gasoline prices,” analysts at CIBC noted in a research piece.

However, some investors have come to view the U.S. economy — as a major energy exporter — as potentially insulated from the energy shock, fueling a flight to the U.S. dollar as a safe haven during the crisis.

Inflation Heats Up

Meanwhile, the personal consumption expenditures price index for March came in at 3.5% year-on-year and 0.9% month-on-month, with both readings accelerating from the previous month and matching estimates. The metric is one of the Federal Reserve’s preferred gauges of inflation.

Stripping out food and fuel, so-called “core” PCE rose to 3.2% in the twelve months to March, up from 3.0% in February.

Core PCE prices for the first quarter jumped to 4.3% — compared with 2.7% in the previous quarter and expectations of 4.1%. The CIBC analysts described this reading as “uncomfortably hot.”