The US economy grew steadily but less robustly than anticipated during the first quarter, the government reported, while inflation added momentum that may be worrisome for Federal Reserve policy-makers.
The Commerce Department said gross domestic product, which measures total output within US borders, expanded at a 4.2 per cent annual rate in the January-March period, well under the five per cent forecast. That followed growth of 4.1 per cent in the fourth quarter and a sizzling 8.2 per cent in the third quarter of last year.
But a key measure of inflation pressures based on personal consumption expenditures - the PCE price index excluding food and energy that Fed Chairman Alan Greenspan is known to monitor - virtually doubled. The price gauge climbed at a two per cent annual rate after gaining 1.2 per cent in the fourth quarter and one per cent in the third quarter.
"This was a strong report that confirms the economy is in the midst of a broad-based expansion and that inflation is no longer dormant," said economist Joel Naroff of Naroff Economic Advisors Inc. in Holland, Pennsylvania.
A poll by Reuters of Wall Street economists found half - 11 out of 22 - now anticipate the Federal Reserve will raise interest rates this summer to try to prevent a breakout in prices amid evidence some companies already are raising them.
August was considered most likely for a rate hike but some analysts thought June, August or September were possibilities.
US Treasury bond prices also yielded to fears about inflation taking hold, which saps their investment potential. The 30-year US Treasury bond was down 13/32s of a point while its yield, which moves in the opposite direction, rose to 5.32 per cent from 5.29 per cent.
The dollar lost ground, on the apparent belief that interest-rate hikes - which make US dollar investments more attractive - were not as imminent as feared.
Stocks behaved erratically, rising in early trading but then plunging despite some strong corporate earnings reports as worry about budding inflation set in.
The Fed's policy-setting Federal Open Market Committee is meeting on Tuesday amid growing indications the US central bank is readying financial markets for higher rates, possibly later this year, to keep inflation in check as the expansion from the 2001 recession continues to gain strength.
The central bank is not expected to raise rates next week. But it is likely to announce after Tuesday's meeting that it now sees economic risks balanced between rising prices and slower growth, laying the groundwork for a future rate rise.
Economist Sung Won Sohn of Wells Fargo & Co. in Minneapolis said the GDP report indicated the economy has reached "a sustainable, self-reinforcing growth path" after a lengthy struggle. But there is slack, in unused factory capacity and unemployed workers, to keep rate rises at bay.
Treasury Secretary John Snow said faster growth will produce "a lot more jobs in coming months", but wouldn't be pinned on how many jobs. "Our upward trend is strong," he said.
Growth is undeniably speeding up, even if it was less robust than expected in the first quarter. GDP expansion during the three quarters ending in March averaged 5.5 per cent a quarter, the strongest in 20 years for any nine-month period.
Consumers added punch to the economy in the first quarter, increasing their spending at a 3.8 per cent rate, up from 3.2 per cent in the final three months of 2003. But spending on durable goods, like new cars, dipped 4.7 per cent in the first quarter - the first fall in nearly four years after a small 0.7 per cent rise in the fourth quarter.
Government spending, especially defence spending as violence in Iraq intensified, jumped. Defence expenditures swelled 15.1 per cent, five times the three per cent rise posted in the final quarter last year.
A key missing ingredient in the overall expansion has been stepped-up creation of new jobs, something that Democratic opponents of President George W. Bush have hammered as the campaign for November presidential elections intensifies.
Separately, the Labour Department said first-time claims for jobless assistance from the government plunged last week. Claims fell 18,000 to 338,000, heightening the possibility of a second consecutive report of brightening job prospects when April payrolls data is issued.
Another Labour report showed employment costs, which figure prominently in driving price rises, were up more steeply than anticipated. The Employment Cost Index, a gauge of employers' payments in wages and benefits, rose 1.1 per cent in the first quarter after a 0.8 per cent gain in the fourth quarter - the largest quarterly gain in a year.