U.S. Economy Slows in Q2 as Inflation Complicates Fed Rate Outlook

The U.S. Commerce Department reported Thursday that economic growth slowed in the second quarter.

It noted a widening in the trade deficit, but an acceleration ‌in consumer spending and strong business investment in equipment related to the buildout of artificial intelligence infrastructure as an underlying strength, according to Reuters.

Gross domestic product rose at a 1.5% annualized rate last quarter, the Commerce Department’s Bureau of Economic Analysis said in its advance estimate of second-quarter gross domestic product. Reuters said that economists it polled ​had forecast GDP rising at a 2.1% pace.

Meanwhile, inflation in June held well above the Federal Reserve’s goal and complicated the central bank’s policy path, the Commerce Department said.

CNBC noted that economists surveyed by Dow Jones had been looking for a growth rate of 1.8%, following the 2.1% increase in the first quarter.

According to CNBC, a separate report showed that the personal consumption expenditures price index, which is the Federal Reserve’s primary forecasting gauge, dropped a seasonally adjusted 0.1% for the month, putting the annual inflation rate at 3.7%. Excluding food and energy, core PCE posted a monthly increase of 0.1% and an annual level of 3.3%, against respective forecasts for 0.2% and 3.3%, CNBC said.

Gauge for Setting Policy

The Fed technically uses the headline PCE number as its gauge for setting policy, but most officials consider core inflation as a better indicator of longer-run trends.

The reports come a day after a divided Federal Reserve committee voted 9-3 to hold its benchmark borrowing rate in a range between 3.5%-3.75%, where it has been all year.

CNBC noted that inflation has taken the primary focus for Fed policymakers as labor market indicators have stabilized this year. The three dissenting votes came from regional presidents who have expressed concerns about higher prices and the failure to make progress toward the prices side of the central bank’s mandate.

While the GDP number was below expectations, CNBC said that the miss appeared to come from a decline in federal government spending and inventories. Other parts of the economy appeared strong, CNBC said. It noted that key areas of the economy continued to show improvement: Personal spending was up 2.1% after eking out a 0.4% gain in the first quarter.

Inventories fell 0.7% and federal spending was off 0.3%, subtracting from the top-line reading. Gross private domestic investment was up 0.5% while exports also rose 0.5% and imports declined 1.5%. Exports generally add to GDP while imports subtract, CNBC noted.

On the inflation, the Commerce Department said that the figures were close to expected though still well above the Fed’s 2% target.

Surge in Energy Prices

CNBC said that inflation numbers had been easing heading into 2026 but accelerated after the U.S. and Israel attacked Iran in late February, setting off a surge in energy prices that Fed officials worry will bleed over into the broader economy.

Energy goods and services prices tumbled by 5.9% in June, helped by a temporary ease in the Middle East fighting that sent gasoline down 9.2%. Housing inflation also moderated, CNBC said, rising just 0.2%. Goods prices overall declined by 0.6% while services increased just 0.1%.