Growth in the U.S. slowed considerably during the first three months of the year as interest rate increases and inflation took hold of an economy largely expected to decelerate even further ahead.

Gross domestic product, a measure of all goods and services produced for the period, rose at a 1.1% annualized pace in the first quarter, the Commerce Department reported Thursday. Economists surveyed by Dow Jones had been expecting growth of 2%.

The growth rate followed a fourth quarter in which GDP rose 2.6%, part of a year that had a 2.1% increase.

The report also showed that the personal consumption expenditures price index, an inflation measure that the Federal Reserve follows closely, increased 4.2%, ahead of the 3.7% estimate. High inflation and slow growth is sometimes described as “stagflation,” which characterized the late 1970s and early ’80s U.S. economy.

Stocks initially reacted little to the report, with major indexes pointing to a higher open. Treasury yields increased.

The slowdown in growth came because of a decline in private inventory investment and a deceleration in nonresidential fixed investment, the report stated. The inventory slowdown took 2.26 percentage points off the headline number.

Consumer spending as measured by personal consumption expenditures increased 3.7% and exports were up 4.8%. Gross private domestic investment tumbled 12.5%.

“The U.S. economy is likely at an inflection point as consumer spending has softened in recent months,” said Jeffrey Roach, chief economist at LPL Financial. “The backward nature of the GDP report is possibly misleading for markets as we know consumers were still spending in January but since March, have pulled back as consumers are getting more pessimistic about the future.”

The report comes as the Federal Reserve is seeking to slow an economy burdened by inflation that had been running at its highest level in more than 40 years.

In a policy tightening regime that began in March 2022, the central bank has raised its benchmark interest rate by 4.75 percentage points, taking it to the highest level in nearly 16 years. Though inflation has pulled back some from its peak of around 9% last June, it remains well above the Fed’s 2% goal. Policymakers all say inflation is still too high and will require elevated interest rates.

At the same time, growth has taken a hit from troubles in the banking sector that are likely to infect the economy ahead. Those two issues — the Fed’s rate hiking cycle and an expected credit crunch — are expected to tilt the economy into recession later this year.