Inflation rises but isn't hotter than expected while GDP slips

NEW YORK, May 28 (Reuters) - Estimated U.S. economic growth for the first quarter was revised lower on Thursday and a closely watched measure of price pressures came in largely in line with expectations. U.S. markets opened slightly lower.

Gross domestic product increased at a 1.6% annualized rate last quarter, the Commerce Department's Bureau of Economic Analysis said in its second estimate of first-quarter GDP on Thursday. Growth was previously reported to have advanced at a 2.0% pace. Economists polled by Reuters had expected that GDP growth would be unrevised at a 2.0% rate.?The downgrade to the first-quarter GDP estimate reflected downward revisions to inventory investment and consumer spending.?

Meanwhile the personal consumption expenditures price index?jumped 3.8% in the 12 months through?April, the largest rise since May 2023,?the Commerce Department's Bureau of Economic Analysis said on Thursday. PCE inflation advanced by?an unrevised 3.5% in March.

Economists polled by Reuters had forecast PCE inflation increasing 3.8% year-on-year.?The PCE price index?rose 0.4% month-on-month in April after shooting up 0.7% in March.

Excluding the volatile food and energy components, the PCE price index?increased 3.3% year-on-year in April after rising 3.2% in March.?The so-called core PCE inflation?gained 0.2% in a monthly basis after advancing 0.3% in March.

MARKET REACTION:

STOCKS: Indexes were slightly lower on Thursday morning following the data, with the S&P 500 down 0.1% and the Nasdaq composite off 0.3%.

BONDS: Treasury yields were mostly unchanged. The 2-year yield was at 4.04% and the 10-year yield was at 4.48%.?

FOREX: The? dollar index was a bit lower, off 0.1% at 99.16.

COMMENTS:

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK:

"The two key numbers here are inflation on a yearly basis, and of course, economic growth, GDP, which was revised downward. What the numbers point to today is simply that we have a stagflation problem.

"And that's a big problem for the Fed. We have growth that's not that strong and rising inflation. And that suggests that a Fed hike is getting closer to reality as opposed to a rate cut."

ANGELO KOURKAFAS, SENIOR GLOBAL INVESTMENT STRATEGIST, EDWARD JONES, ST. LOUIS, MISSOURI:

"I don't think the data changed the narrative. The [PCE] number was not as bad as feared. It pushes back a little bit against some expectations for rate hikes.

"At the end of the day, though, we know that's backward looking, and a lot of the focus is on the negotiations or lack thereof, the achievement of a peace deal. So, oil prices are still moving inflation expectations around. We do have a situation where consumers continue to spend. There is also a lot of intense AI spending, and that's part of the inflation story."

JOEL KRUGER, MARKET STRATEGIST, LMAX GROUP, LONDON:

"Softer core inflation readings and weaker headline growth data are helping fuel a risk-on reaction, with markets taking comfort in signs that underlying price pressures may be easing without a meaningful deterioration in the labor market, helping to take some pressure off the Fed and support expectations for a less restrictive policy outlook."

(Reporting by Lucia Mutikani, Utkarsh Hathi, Laura Matthews, Stephen Culp; editing by Colin Barr)