Stagflation Shock: GDP Growth Slows Much More Than Expected While Inflation Accelerates Joe Raedle/Getty Images

The U.S. economy grew at a meager 1.6 percent annual rate and inflation surged higher in the first three months of the year, the government reported Thursday.

Economists had expected gross domestic product would grow at a 2.5 percent rate. In the fourth quarter of 2023, the economy grew at a 3.4 percent annual pace.

Consumer spending was solid but weaker than many economists had forecast, with consumers pulling back sharply on spending on goods. Spending on durable goods declined at a 1.2 percent annual pace. Spending on services rose four percent. Overall spending rose at a 2.5 percent rate, below the three percent estimated and the 3.3 percent recorded in the final three months of 2023.

Despite the slowdown in consumer spending, inflation accelerated. The personal consumption expenditure price index rose at a 3.4 percent pace in the first quarter, nearly twice the 1.8 percent increase in the prior three-month period.

Exports were weak, reflecting soft demand from struggling economies around the world, while imports surged. Imports subtract from gross domestic product.

Underlying domestic economic demand was still robust, somewhat softening the impact of the weaker headline growth figures.  Final sales to private domestic purchasers rose at a 3.1 percent rate, only slightly lower than the 3.3 percent recorded at the end of last year and above the three percent pace in the third quarter of last year.

Business fixed investment was up at a 2.9 percent annual rate. Investment in business structures fell but equipment and intellectual property investment rose. Residential investment grew at a very fast 13.9 percent annual rate.

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