The nation’s gross domestic product grew at an annual rate of 1.5% in the second quarter, the Commerce Department said Thursday, weaker than economists expected and a sign the Iran war is hurting growth.

Economists polled by Reuters predicted GDP would rise at an annualized rate of 2.1% for April to June. GDP measures the total value of goods and services produced in the U.S. The economy grew at a 2.1% annual rate in the first quarter.

The reading shows an economy grappling with the impact of the conflict in the Middle East, which has disrupted shipping in the Strait of Hormuz and driven up global energy costs. In the second quarter, a surge in oil prices lifted U.S. gasoline prices from an average of $2.98 a gallon just before the war started in late February to well over $4.

“With gas prices rising again, the squeeze on real incomes will put renewed pressure on consumer spending in the second half of the year,” Oxford Economics said in a report.

Despite those pressures, U.S. consumers continued to spend at a healthy clip in the second quarter, the Bureau of Economic Analysis said in its latest snapshot. 

Households are largely weathering the shock of higher gas prices, according to Thomas Ryan, senior North America economist at Capital Economics. “Even so, it remains unclear whether they can absorb another hit now that retail gasoline prices have risen back above $4 a gallon,” he said in a note to investors. 

Along with solid consumer spending, booming investment in artificial intelligence is also keeping the economy moving forward, according to Oxford Economics.

“Consumers benefited from a healthy labor market, tax refunds and reductions, positive wealth effects from the equity market, and any shortfall after that due to higher energy prices was bridged by a pullback in savings,” Nationwide Chief Economist Kathy Bostjancic said in a report.

Inflation slowed in June

Separate government data released on Thursday, the Personal Consumption Expenditures (PCE) index, rose at an annual rate of 3.7% in June, in line with economists’ forecasts. The reading represents a slowdown from May, a welcome sign for the Federal Reserve as it tries to curb inflation. 

PCE captures the changes in the prices of goods and services purchased by consumers over time. Core PCE, which excludes the more volatile food and energy prices, rose 3.3% last month.

Analysts said the softer inflation figures are likely to deter the Fed from hiking its benchmark interest rate in the short term.

“The weaker-than-expected GDP numbers this morning could be cause for concern that the economy is slowing too quickly,” Chris Zaccarelli, chief investment officer for Northlight Asset Management, said in an email. “On the other hand, the lower PCE readings should give the Fed some more room to be patient and not raise interest rates prematurely.”

The Fed said on Wednesday that it would hold its key interest rate steady. Yet three members of the 12-member Federal Open Market Committee voted to raise interest rates, signaling internal division in the Fed over how to handle inflation, which remains stubbornly above the central bank’s 2% target. 

During a press conference on Wednesday, Fed Chairman Kevin Warsh said it might take time to reach the Fed’s 2% target.

“We understand that the five-plus years of inflation above target cannot be cured in nine weeks, or by a single month of modest price decreases,” he told reporters.

Oxford Economics predicts that core inflation will remain elevated, ending the year at 3.1% annually. “It won’t be until next year that core inflation heads sustainably lower,” the investment advisory firm said.