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US economic growth slows but inflation grows
In the first three months of this year, the US economy grew by less than anticipated, but inflation picked up steam, potentially delaying a reduction in interest rates.
According to official data, the economy grew at an annualized pace of 1.6%, far less than predicted and in line with the growth observed in the last few months of 2023.
In the meantime, the rate at which prices are rising—known as inflation—has gone up.
At the start of the year, experts had been forecasting a series of interest rate cuts in the US.
However, inflation is yet to fall back to the Federal Reserve’s 2% target, and on Thursday, figures from the US Department of Commerce showed that inflation increased by 3.4% in the first three months of 2024. This is compared to an increase of 1.8% in the final three months of 2023.
Raising interest rates makes borrowing – for things such as loans and mortgages – more expensive and theoretically is meant to encourage people to spend less. The idea is that this helps to bring inflation down by dampening demand.
However, US inflation has not fallen back as quickly as expected.
Simultaneously, the gross domestic product (GDP) has experienced a slowdown in growth, from 3.4% in the last quarter of 2017 to 1.6% now. The only slowdown predicted by economists was 2.4%.
The credit rating agency Fitch’s Olu Sonola, head of US economic research, stated: “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.”
The key US interest rate is between 5.25% to 5.5% – the highest level in more than 20 years.
Stuart Cole, chief macro economist at Equiti Capital in London, said the US 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”, will be released on 30 May.
Nevertheless, the economy is a key issue as the US heads towards an election later this year.