US cuts first-quarter growth estimate as inflation rises

The US economy grew at a slower pace in the first quarter than previously estimated, raising concerns ahead of midterm elections. The Commerce Department revised its gross domestic product (GDP) growth rate downward to 1.6% annualized, down from an earlier estimate of 2.0%, due to weaker investment and consumer spending. Economists noted that services spending, particularly in medical services, slowed, and business inventories fell more than expected. The downward revisions to consumer spending, combined with a slowdown in April, suggest financial strain on households. Inflation pressures worsened as the Federal Reserve’s preferred PCE price index climbed to 3.8% year-over-year, the highest since 2023. Personal consumption expenditures rose by 0.5% in April, but disposable income declined by 0.1%, signaling tighter budgets for Americans. Higher gasoline prices, driven by geopolitical tensions in the Middle East—including US-Israeli strikes on Iran and retaliatory actions blocking the Strait of Hormuz—fueled inflation and consumer spending on fuel surged by $28.8 billion in April compared to the prior year. Analysts warned that rising energy costs and inflation are eroding consumer purchasing power, with 70% of the US economy reliant on consumer spending. New home sales dropped 6.2% in April to a seasonally adjusted annual rate of 622,000, down 11.3% from the same period last year, as median home prices rose 8.0% and mortgage rates hit 6.5% by mid-May. Economists expect growth to remain moderate amid lingering energy shocks and weaker wage growth, despite a slight GDP acceleration to 0.5% in the fourth quarter of 2025. The slowdown reflects broader economic challenges, including reliance on AI-driven investment and fading tax refund boosts. Treasury Secretary Scott Bessent expressed optimism that gasoline prices would ease once tensions in the Middle East subside, though analysts remain cautious about sustained recovery. The data underscores mounting pressures on American households as inflation and higher living costs weigh on economic activity.