The US economy is showing signs of recovery with first-quarter GDP growth accelerating to 2%, up from a lackluster 0.5% in the previous quarter. While the acceleration was helped by government spending and investment in the AI sector, the figure is still below economists’ initial forecast of 2.2%.
However, the recovery has been overshadowed by rising inflationary pressures due to the military conflict in Iran. The closure of the Strait of Hormuz has caused energy prices to soar, pushing annual PCE inflation for March to 3.5%, while gasoline prices at the pump are now above $4 a gallon.
Monthly Core PCE data showed a steady 0.3% increase, in line with market expectations. However, on a quarterly basis, Core PCE jumped to 4.3%, above expectations of 4.1%. Analysts have described this level of inflation as “something to worry about” for the Federal Reserve.
Consumer spending has been on the decline since the war broke out in late February as the cost of living has risen. While the AI sector has helped offset the impact, analysts predict domestic consumption will continue to slow if fuel prices show no signs of easing anytime soon.
The US dollar remains the safe haven asset of choice for investors amid the global energy crisis. The US's status as a major energy exporter provides some economic protection, but long-term stability depends on the Fed's ability to control core inflation, which is currently trending higher.
