US economic growth has slowed sharply to its weakest rate in almost two years as high interest rates pile pressure on the world’s largest economy. But inflation continues to loom large.
Gross domestic product increased at an annualized rate of 1.6% in the first quarter, according to official data: significantly short of the 2.4% rate expected by economists.
But a closely watched measure of inflation also rose faster than anticipated, raising questions about the Federal Reserve’s next steps in its fight to bring down price growth.
The so-called “core” personal consumption expenditures (PCE) price index – which strips out volatile food and energy costs – rose 3.7% in the first three months of the year, according to a report published by the commerce department’s Bureau of Economic Analysis. Economists had expected a 3.4% increase.
Wall Street was rattled by the latest figures, with the S&P 500, Dow Jones industrial average and Nasdaq all openly sharply lower on Thursday. US Treasury yields also rose sharply.
Inflation has been easing in the US, with unemployment remaining low and growth largely resilient, raising hopes that the Fed will guide the world’s largest economy to a so-called “soft landing”, where price growth normalizes and recession is avoided.
But Thursday’s data on the first quarter – with growth fading, and inflation on the rise – will test this confidence.
“Q1’s sluggish increase in GDP likely sets the tone for the rest of 2024,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, predicting that core PCE inflation “will rise at an annualized rate much closer to 2%” over the next few months.
The state of the US economy has seized Americans’ attention as the election season has intensified. Although inflation has slowed sharply, to 3.5% from 9.1% in 2022, prices remain well above their pre-pandemic levels.
Republican critics of Joe Biden have sought to pin responsibility for high prices on the US president and use it as a cudgel to derail his re-election bid. Polls show that despite the healthy job market, a near record-high stock market and the sharp pullback in inflation, many Americans blame Biden for high prices.
Associated Press contributed reporting