U.S. economic growth was revised lower for the first quarter, and a fresh inflation reading showed price pressures still running well above the Federal Reserve’s target, underscoring a slower and more complicated start to 2026 for businesses and consumers.

Real gross domestic product increased at a 1.6% annualized rate from January through March, the Bureau of Economic Analysis said Thursday in its second estimate for the quarter. The figure was down from the government’s initial 2.0% estimate and reflected downward revisions to investment and consumer spending. The economy had grown at a 0.5% pace in the fourth quarter of 2025.

The revision does not point to a contraction, but it narrows the margin of comfort for companies counting on resilient household demand and sustained business investment. BEA said the contributors to first-quarter growth included exports, investment, consumer spending and government spending, while imports, which subtract from GDP, also increased. The agency said the downgrade primarily reflected softer private nonfarm inventory investment and a weaker estimate for services spending, including health care.

The updated GDP figures arrived alongside April personal income and outlays data showing that inflation accelerated on an annual basis. The PCE price index increased 0.4% from March and 3.8% from a year earlier. Excluding food and energy, the core PCE price index rose 0.2% for the month and 3.3% from April 2025. Both readings remain above the Fed’s 2% inflation goal, keeping pressure on policymakers even as growth slows.

For consumers, the April report showed a widening gap between nominal spending and real purchasing power. Personal consumption expenditures increased $111.1 billion, or 0.5%, in current-dollar terms. But real PCE, which adjusts for inflation, rose only 0.1%. Disposable personal income fell $19.9 billion, or 0.1%, and real disposable personal income dropped 0.5%. The personal saving rate declined to 2.6%, according to BEA.

That pattern matters for retailers, restaurants, travel companies, banks and consumer lenders. Consumers are still spending, but inflation is capturing a larger share of the increase. When income growth is flat and real income falls, households have fewer ways to absorb higher costs without drawing down savings, using credit or cutting discretionary purchases. That can make revenue growth look stable in nominal terms while unit demand and margins weaken underneath.

The GDP report showed consumer spending was still a positive contributor to growth in the first quarter, but the trend was less robust than initially estimated. Reuters reported that growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised down to a 1.4% rate from the previously reported 1.6% pace. The BEA also said first-quarter real final sales to private domestic purchasers, a measure of underlying domestic demand that excludes government, trade and inventories, increased 2.4%, slightly below the prior estimate.

Business investment remained one of the stronger areas of the economy, though the broader investment category was part of the downward GDP revision because inventories were weaker than first estimated. Reuters reported that business spending on equipment increased at an unrevised 17.2% pace. That suggests corporate capital expenditure, including technology-related investment, continued to support growth even as household spending became more constrained.

Corporate profit data also showed a cooler backdrop. BEA said profits from current production increased by $40.4 billion in the first quarter after rising $246.9 billion in the fourth quarter. The slowdown does not necessarily indicate broad profit weakness across all sectors, but it adds to evidence that the economy’s early-year expansion was less vigorous than the initial GDP estimate suggested.

The inflation data are likely to shape market expectations around interest rates. The Fed uses PCE inflation measures as key inputs in judging progress toward its 2% target. With headline PCE at 3.8% and core PCE at 3.3%, policymakers have limited evidence that price pressures have returned to a sustainable path. At the same time, the lower GDP estimate points to slower growth, creating a more difficult trade-off between controlling inflation and avoiding unnecessary pressure on employment and demand.

Energy prices and broader goods costs have added to household strain. Reuters reported that April’s inflation increase was driven in part by higher energy prices tied to the Iran war, while goods prices and food prices also rose. BEA’s own release showed services spending accounted for $67.2 billion of the current-dollar PCE increase in April, while goods spending rose $44.0 billion. That mix shows inflation pressure moving through both essential and discretionary categories.

For U.S. companies, the reports point to a planning environment defined by uneven demand rather than a clean slowdown. Some businesses continue to benefit from investment spending, exports or higher nominal sales. Others face customers who are still employed but more price-sensitive, with thinner savings buffers and less real income. The result may be a sharper divide between companies with pricing power and those that must discount to protect volume.

Financial markets will also weigh the data against incoming labor, credit and earnings reports. Slower GDP growth can support expectations that policy will eventually become less restrictive, but persistent inflation makes that path less straightforward. If inflation remains elevated while real income weakens, investors may become more cautious about consumer-facing companies, small businesses and rate-sensitive sectors such as housing and commercial real estate.

The next major test will be whether second-quarter data show inflation easing without a deeper pullback in demand. BEA is scheduled to release the third estimate of first-quarter GDP on June 25, the same day it will publish May personal income and outlays. Until then, Thursday’s reports leave the U.S. economy in a mixed position: still growing, still spending and still investing, but with less momentum than first reported and with inflation continuing to erode consumer purchasing power.