US economic growth slows to 1.1% as inflation accelerates

US economic growth slowed in the first quarter by more than expected as tepid business investment and a pullback in inventories tempered a pickup in consumer spending.

Gross domestic product rose at a 1.1 per cent annualised rate on the back of the strongest consumer spending in nearly two years, the Commerce Department’s initial estimate showed on Thursday. The Federal Reserve’s preferred underlying inflation metric accelerated to a one-year high.

The 3.7 per cent increase in consumer spending reflected gains in both goods and services, including a surge in purchases of motor vehicles. Business investment in equipment posted the biggest drop since the start of the pandemic and inventories subtracted the most from GDP in two years.

The figures illustrate economic growth that is gradually downshifting under the weight of Fed interest-rate hikes and elevated inflation. While the economy bounded ahead at the start of the year, helped in part by unseasonably warm weather, households and businesses pulled back on spending as the quarter progressed.

The outlook depends largely on the resiliency of the job market. Low unemployment and persistent wage gains have so far allowed consumers to weather high inflation and keep spending.

The personal consumption expenditures price index grew at a 4.2 per cent annualised pace in the January to March period. Excluding food and energy, the index rose 4.9 per cent, faster than forecast and the most in a year. March data will be released on Friday. Services inflation remained hot while prices of non-durable goods accelerated.

The inflation and consumer spending figures likely keep the Fed on track to raise interest rates by a quarter percentage point next week. First Republic Bank’s continuing struggles, however, do raise the possibility that the central bank could pause.

“Inflation remains stubborn, and along with the continued strength in the labour market, it should keep the Fed on pace for a May and potentially a June rate hike,” said Cliff Hodge of Cornerstone Wealth.

The median projection in a Bloomberg survey of economists called for 1.9 per cent GDP growth and a 4 per cent annualised gain in personal consumption. The S&P 500 opened higher, Treasury yields jumped and the dollar strengthened after the release.

Separate data out Thursday showed applications for unemployment benefits fell for the first time in three weeks. Continuing claims, which can offer insight into how quickly out-of-work Americans are able to find a new job, were largely unchanged.