(Bloomberg) -- The surprisingly sharp downshift in US economic growth last quarter masked otherwise resilient household demand and business investment that helped generate faster inflation.

Gross domestic product advanced at a 1.6% annualized rate, below all economists’ projections, with the biggest restraints stemming from less inventory accumulation and a wider trade gap. 

However, so-called final sales to private domestic purchasers, which strips out inventories, trade and government spending, rose at a 3.1% rate after adjusting for inflation. For three straight quarters, this key gauge of underlying demand has expanded at least 3%.

That helps explain why the Federal Reserve’s progress on tamping down inflation late last year has stalled. A closely watched measure of underlying price pressures advanced at a greater-than-expected 3.7% clip last quarter, the first acceleration in a year, the Bureau of Economic Analysis report showed Thursday.

With the inflation pickup, Fed officials — who were already expected to hold interest rates at a two-decade high when they meet next week — may face renewed pressure to further delay any cuts and even to consider whether borrowing costs are high enough.

“After an unsettling headline miss, the picture that emerges from the details in today’s GDP report is actually more of the same in terms of the factors that are standing in the way of a lower rate environment,” Wells Fargo & Co. economists Tim Quinlan and Shannon Seery Grein said in a note.

The first-quarter pickup in inflation was driven by a 5.1% jump in service-sector inflation that excludes housing and energy, nearly double the prior quarter’s pace. March figures on inflation, consumer spending and income are due Friday.

Treasuries yields jumped and the S&P 500 Index dropped after the report. Traders focused on the higher inflation readings in the data, rather than the cooler economic growth, pushing out timing of the Fed’s first interest-rate cut to later this year.

While softer than forecast, personal spending increased at a still-healthy 2.5% pace. That was driven by the biggest gain in services outlays since 2021, fueled by health care and financial services. Business outlays for equipment picked up for the first time in nearly a year.

Moreover, residential investment registered the strongest advance in more than three years.

Spending on goods, however, decreased for the first time in more than a year, restrained by motor vehicles and gasoline.

At next week’s Fed meeting, traders will parse Chair Jerome Powell’s comments for clues about the latest thinking around easing policy. He’s previously said that growth can run at a faster rate without stoking inflation thanks to supply-side improvements like immigration, which is boosting the size of the workforce.

Separate data out Thursday showed initial applications for unemployment benefits fell to 207,000 last week, the lowest level in two months. Continuing claims also decreased.

The GDP and inflation figures represent more hurdles for President Joe Biden, who has been trying to convince Americans he’s been doing a good job on the economy. Consumer sentiment has moved sideways in recent months, and voters in key swing states are pessimistic about the outlook.

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