The economy slowed sharply in the first three months of the year as high gas prices cut into consumer spending, bad weather delayed construction projects, and the federal government slashed defense spending by the most in six years. The Commerce Department says the economy grew at a 1.8% annual rate in the January-March quarter. That was weaker than the 3.1% growth rate for the October-December quarter. And it was the worst showing since last spring, when the European debt crisis slowed growth to a 1.7% pace. Federal Reserve Chairman Ben Bernanke and other economists say the slowdown last quarter is a temporary setback. They generally agree that gas prices will stabilize and the economy will grow at a 3% pace in each of the next three quarters. But gas prices are still going up. The national average on Thursday was $3.88 a gallon, an increase of 30 cents from a month ago, when the first quarter ended.
An inflation gauge in the report showed consumer prices rose last quarter at the fastest pace in nearly three years, with most of the increase coming from higher fuel costs. Rising gas prices are draining most of the extra money that Americans are receiving this year from a Social Security payroll tax cut. In the January-March quarter, consumers boosted spending at a 2.7% pace. That was down from a 4% pace in the prior quarter and was the weakest pace since last summer. Pump prices were mostly blamed for the pullback, although harsh winter weather also discouraged people from shopping.
