The US economy was slowing even before the brunt of any credit crunch stemming from the recent bank failures, while inflation accelerated, highlighting the enormous challenge faced by the Federal Reserve.

Gross domestic product rose an annualized 1.1% in the first quarter, notably less than the median forecast for 1.9% in Bloomberg’s survey, Bureau of Economic Analysis data showed Thursday.

The slowdown was largely driven by an inventory drawdown, with an acceleration in consumer spending providing the main impetus for growth. Still, economists warned that momentum slowed as the quarter progressed, in a warning sign for the current quarter.

Frustratingly for the Fed, the central bank’s preferred core gauge of prices, which excludes food and energy, picked up to 4.9% in the January-through-March period, the quickest pace in a year. Meantime, a separate report underscored enduring strength in the labor market, with weekly jobless claims unexpectedly dropping.

It all adds up to a strengthened case for Fed Chair Jerome Powell and his colleagues to raise rates another 25 basis points at the May 2-3 policy meeting. Two-year Treasury yields climbed on that bet Thursday morning. It also suggests a higher risk of a stagflationary environment, where the economy slumps while inflation sticks at a pace well above the Fed’s 2% target.

“This morning’s data was the worst of both worlds, with growth down and inflation up,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

Data due Friday will offer a more detailed look at how consumer spending evolved during the quarter. Economists are penciling in a 0.1% drop in real personal outlays for a second month March after a 1.5% jump for January — when warm weather bolstered retail sales.

“Consumption was weak late in the quarter,” Morgan Stanley’s US economists, led by Ellen Zentner, said in a note. In addition to weather pulling spending forward, less federal support to lower-income households for food expenses also played a role in the tempering of purchases late in the quarter, they wrote.

Zentner and her colleagues said they “expect to see significant slowing into second-quarter 2023 as the cumulative effect of tighter monetary policy as well as banking pressures push growth into negative territory.”

Economists are forecasting GDP to grow at a stall-speed pace of 0.2% this quarter, a Bloomberg survey shows.

This article was provided by Bloomberg News.