The US economy grew at its slowest pace in nearly two years last quarter as inflation topped Wall Street estimates.

The Bureau of Economic Analysis’s advance estimate of first quarter US gross domestic product (GDP) showed the economy grew at an annualized pace of 1.6% during the period, missing the 2.5% growth expected by economists surveyed by Bloomberg. The reading came in significantly lower than fourth quarter GDP, which was revised up to 3.4%.

Meanwhile, the “core” Personal Consumption Expenditures index, which excludes the volatile food and energy categories, grew by 3.7% in the first quarter, above estimates for 3.4%, and significantly higher than 2% gain seen in the prior quarter.

The data’s release comes as investors try to gauge when the Federal Reserve will start cutting interest rates and if the central bank can achieve a soft landing, where inflation comes down to its 2% target without a significant economic downturn.

“This report pours cold water on the misleading narratives of a reaccelerating economy,” EY chief economist Gregory Daco wrote in a research note following the print. “As we enter the spring, the underlying growth mix continues signal robust momentum, but demand growth is gently cooling leading to easing inflationary pressures.”

Economists pointed out that a large reason GDP for the first quarter came in softer than expected was weaker data in trade and exports, which together weighed on GDP growth for the quarter by about 1.2 percentage points.

“The deceleration in GDP growth will not worry the Fed as the details are better than the headline would suggest,” Oxford economics chief US economist Ryan Sweet said.

“The headline number really belies the underlying strength,” Deutsche Bank senior US economist Brett Ryan told Yahoo Finance.

Ryan said the print doesn’t cast further overall concern on a potential slowdown brewing in the US economy and believes areas like inventories and exports, which feed into GDP, will rebound next quarter.

He noted that the surprise rise in inflation was the “big story” from Thursday’s data release and markets seemed to agree.

The 10-Year Treasury yield (^TNX) added nearly seven basis points to reach above 4.7% for the first time since early November 2023. All three major indexes shot lower after the release. In morning trade, the S&P 500 (^GSPC), Dow Jones Industrial Average (^DJI) and Nasdaq Composite (^IXIC) were all off more than 1%.

“The recent firmness in inflation will keep interest high for longer,” Sweet wrote.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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