New inflation threat to US

After its surge in late 1993, the US economy grew at a modest 2.6 per cent in the first quarter of this year, a rate considerably slower than expected by most economists but coupled with the first clear signs that inflation may be on the rise once more.

The preliminary figures for gross domestic product issued yesterday by the Commerce Department will be revised twice in the coming weeks. But the autumn and early winter boom, which produced fourth- quarter 1993 growth of 7 per cent, is clearly over.

Analysts had been expecting expansion of 3 to 3.5 per cent in the January-March period. In the event an icy winter, rising interest rates and weak exports depressed performance even more.

The government also reported a March rise of only 0.4 per cent in factory orders, also smaller than predicted.

The new data support White House estimates that the economy will grow by around 3 per cent this year, too little to rekindle inflation. However GDP-related inflation doubled to 2.6 per cent in the first quarter, the highest figure in a year and one that explains the Fed's recent increase in short-term interest rates.

The conflicting signals sent bond prices skidding. After an early increase prompted by the slower growth rate, the benchmark 30-year Treasury bond changed direction by mid-session, tumbling more than one and a half points as traders focused on the worrying inflation trend. The yield jumped to 7.2 per cent from 7.1 per cent.

Already higher long-term rates have made mortgages more expensive, weighing on the housing market. The rise in the GDP deflator, analysts say, means the Fed will probably continue its strategy of nudging short-term rates higher, after the 0.75 per cent increase already in 1994.

Following the surge late last year, consumer spending slowed sharply in the first quarter, increasing at an annual rate of only dollars 32bn, less than half the rate in late 1993. One reason could be smaller pay increases.