U.S. economic growth was much weaker than expected to start the year and prices rose at a faster pace, the Commerce Department reported Thursday.

Gross domestic product, a broad measure of goods and services produced in the January-through-March period, increased at a 1.6% annualized pace when adjusted for seasonality and inflation, according to the department’s Bureau of Economic Analysis.

Economists surveyed by Dow Jones had been looking for an increase of 2.4% following a 3.4% gain in the fourth quarter of 2023 and 4.9% in the previous period.

Consumer spending increased 2.5% in the period, down from a 3.3% gain in the fourth quarter. Fixed investment and government spending at the state and local level helped keep GDP positive on the quarter, while a decline in private inventory investment and an increase in imports subtracted.

There was some bad news on the inflation front as well.

The personal consumption expenditures price index, a key inflation variable for the Federal Reserve, rose 3.4% for the quarter, its biggest gain in a year. Excluding food and energy, core PCE prices rose at a 3.7% pace, well above the Fed’s 2% target. Central bank officials tend to focus on core inflation as a better indicator of long-term trends.

The price index for GDP, sometimes called the “chain-weighted” price index, increased at a 3.1% rate, compared to the Dow Jones estimate for a 3% increase.

Markets slumped following the news, with futures tied to the Dow Jones Industrial Average were off more than 400 points. Treasury yields moved higher, with the benchmark 10-year note most recently at 4.69%.

The report comes with markets on edge about the state of monetary policy and when the Federal Reserve will start cutting its benchmark interest rate. The federal funds rate, which sets what banks charge each other for overnight lending, is in a targeted range between 5.25%-5.5%, the highest in some 23 years though the central bank has not hiked since July 2023.

Investors have had to adjust their view of when the Fed will start easing as inflation has remained elevated. The view as expressed through futures trading is that rate reductions will begin in September, with the Fed likely to cut just one or two times this year.

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