Tax refunds that fattened Americans’ wallets and a buoyant investment cycle powered by artificial intelligence are temporarily insulating the U.S. economy from the worst of the Iran‑driven oil shock, but the protective layer is thinning fast, a raft of government reports and economist assessments released Thursday indicates.
The Federal Reserve’s closely watched inflation barometer — the Commerce Department’s Personal Consumption Expenditures price index — jumped 0.7% in March from the prior month and 3.5% from a year earlier, the largest annual increase since May 2023. The chief culprit was not subtle: gasoline prices shot up 21% in March alone after Iran responded to U.S. and Israeli strikes by closing the Strait of Hormuz, creating the greatest oil‑supply disruption on record.
By Thursday, the national average price for a gallon of regular gasoline had climbed another 7 cents overnight to $4.30, a level not seen in years. A year ago the price stood at $3.18. With each trip to the pump, consumers are diverting dollars away from other goods and services, economists warned.
“Rising tax refunds were outpacing the increased burden of gasoline spending two to one in March and most of April,” wrote Michael Pearce, chief U.S. economist at Oxford Economics. “With tax refund season winding down and gas prices still climbing, the hit to consumer spending will become more evident from May.”
That threat is already reshaping growth forecasts. Joe Brusuelas, chief economist at RSM US, has downgraded his estimate for U.S. economic expansion this year to 1.7% from 2.4% previously. “A year that was set to benefit from tail winds associated with a large tax cut and boom in artificial intelligence‑led investment has been partially derailed by the impact of what as of today is an adverse and growing supply shock caused by the war in Iran,” Brusuelas said.
For now, the economy is holding up. Gross domestic product — the value of all goods and services produced — grew at a 2% annual pace in the January‑to‑March quarter, up from a meager 0.5% in the final three months of 2025, when a 43‑day federal government shutdown sapped more than a percentage point from output. Consumer spending, which accounts for 70% of U.S. economic activity, expanded at a 1.6% annual rate, boosted by the refunds generated by President Donald Trump’s 2025 tax cuts.
Business investment, excluding housing, surged 10.4% — the strongest quarterly jump in nearly three years — as companies poured money into data centres, chips and software to capture the AI boom.
The labor market mirrored the broader tension. The number of Americans filing new claims for unemployment benefits tumbled last week to the lowest level in more than half a century, the Labor Department reported, underscoring job security. Yet hiring is sluggish: employers added 178,000 jobs in March after cutting 133,000 in February, following a gain of 160,000 in January. Economists described the pattern as a “no‑hire, no‑fire” environment that keeps workers in place but locks young and entry‑level applicants out.
Central banks, caught between rising prices and still‑fragile growth, opted to stand still. The Bank of England held its main rate at 3.75% and hinted at future increases. The Fed, the European Central Bank and the Bank of Japan likewise left policy unchanged as they assessed the war’s economic fallout.
The data leave the U.S. economy in a precarious balance. Heavy tax‑refund checks and the AI spending spree are still working, but the shock from gasoline prices is steadily consuming the cushion. As Pearce put it, May is when the real strain begins to show.