U.S. GDP Growth Slows as Inflation Hits Three-Year High

The U.S. Department of Commerce revised first-quarter GDP growth downward to an annualized pace of 1.6%, down from an initial estimate of 2.0%. This deceleration was driven by reduced inventory investment and weaker consumer spending, which fell to a 1.4% rate. While business spending on equipment remained steady and artificial intelligence continues to drive activity, profits from current production slowed sharply to a $40.4 billion rate.

Simultaneously, the Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge, rose to an annual rate of 3.8% in April—the highest level since May 2023. Core inflation, excluding food and energy, rose to 3.3%. This surge followed a February 28 U.S.-Israeli strike on Iran and subsequent Iranian retaliation that virtually blocked the Strait of Hormuz, triggering an oil price shock. High gasoline prices, remaining above $4 per gallon since late March, squeezed household finances and limited real spending growth to 0.1%.

The economic pressure contributed to a drop in the personal saving rate to 2.6%, the lowest since June 2022, and an 11.3% year-on-year decline in new home sales for April. New Federal Reserve chief Kevin Warsh now faces pressure from President Donald Trump to lower borrowing costs, though inflation remains well above the central bank's 2% target. This data may lead policymakers to cancel planned interest rate cuts or implement a rate hike later this year.