The U.S. economy grew at a slower pace in the second quarter of 2026, with gross domestic product increasing by 1.5%, below economists' expectations of 1.8%. This marks a drop from the 2.1% growth recorded in the first quarter. Despite the overall slowdown, underlying economic activities showed resilience, particularly personal spending, which rose by 2.1%, and a robust 3.9% increase in final sales to private domestic purchasers. The weaker headline GDP figure was largely due to decreases in federal government spending and inventory levels.

Inflation remained a key concern as the Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, registered an annual rate of 3.7% in June. The core PCE, which excludes volatile food and energy prices and is regarded as a better indicator of long-term inflation trends, rose 3.3% annually. While inflation rates were roughly in line with forecasts, they remained significantly above the Fed’s 2% target, complicating monetary policy decisions.

Energy prices played a notable role in inflation dynamics, with energy goods and services costs dropping 5.9% in June after earlier spikes linked to geopolitical tensions in the Middle East. Housing inflation also eased, with a modest 0.2% increase. On a quarterly basis, headline PCE inflation surged 5.1%, while core inflation rose 3.4%. Consumer spending continued to hold up for the month, growing by 0.3%, but personal income rose only 0.2%, leading Americans to rely more heavily on savings, which fell to a four-year low of 2.7%.

The Federal Reserve maintained its benchmark interest rate between 3.5% and 3.75% following a 9-3 vote, reflecting ongoing debates among policymakers over how to balance inflation containment with economic growth. Labor market indicators have stabilized, shifting the primary focus to inflation, with some regional Fed leaders expressing concerns about persistent high prices and urging more aggressive action. The latest economic data will be closely watched for signals about the future direction of monetary policy and the broader economic outlook.