US Economic Growth Slows as Inflation Picks Up Again

The United States economy grew at a slower pace than expected in the first three months of 2024, while inflation accelerated — a combination that could delay the interest rate cuts that markets had been counting on this year, as reported by BBC News.

Official figures released on Thursday showed the economy expanded at an annualised rate of 1.6% between January and March, far below the 2.4% that economists had forecast and well below the 3.4% growth recorded in the final three months of 2023. At the same time, inflation, which measures the pace of price rises, gathered pace instead of continuing to ease.

At the start of the year, experts had been forecasting a series of interest rate cuts in the US. However, inflation has yet to fall back to the Federal Reserve's 2% target. Figures from the US Department of Commerce showed that inflation increased by 3.4% in the first three months of 2024, compared with an increase of 1.8% in the final three months of last year.

What the numbers mean for interest rates

Raising interest rates makes borrowing — for things such as loans and mortgages — more expensive and is theoretically meant to encourage people to spend less. The idea is that this helps to bring inflation down by dampening demand. Yet US inflation has not fallen back as quickly as expected, while economic growth, measured as gross domestic product, has slowed from 3.4% in the final quarter of last year to 1.6%.

• US GDP growth in the first quarter of 2024: 1.6% annualised, against expectations of 2.4%
• GDP growth in the final quarter of 2023: 3.4%
• Inflation in the first quarter of 2024: 3.4%, up from 1.8% in the final quarter of 2023
• Federal Reserve inflation target: 2%
• Key US interest rate: 5.25% to 5.5%, the highest level in more than 20 years

Olu Sonola, head of US economic research at Fitch, the credit rating agency, said: "The hot inflation print is the real story in this report. If growth continues to slowly decelerate, but inflation strongly takes off again in the wrong direction, the expectation of a Fed interest rate cut in 2024 is starting to look increasingly more out of reach."

Stuart Cole, chief macro economist at Equiti Capital in the United Kingdom, said the Federal Reserve, which sets interest rates, was "now finding itself caught between a rock and a hard place". "The growth numbers suggest monetary policy has worked its magic and the Fed's foot on the monetary brake can be eased somewhat," he said. "But the inflation figures suggest otherwise, and potentially even point to the need for a further tightening."

The 1.6% growth figure is the first estimate of GDP. A second reading, based on more complete source data, is scheduled for 30 May. Meanwhile, the state of the economy is set to be a key issue as the United States heads towards an election later this year.