The U.S. economy continued growing in the first quarter, albeit at a slower pace, but stubbornly high inflation continues to dash investors’ hopes that the Federal Reserve will begin slashing interest rates in the coming months.

Gross domestic product expanded at a 1.6% seasonally- and inflation-adjusted annual rate in the first quarter, the Commerce Department said Thursday, a pullback from last year’s quick pace. That lagged behind the 2.4% projected by economists polled by The Wall Street Journal.

Despite the continued growth, investors zeroed in on hotter-than-expected inflation data that provided the latest evidence that Americans face stiff price pressures across the economy.

The continued inflation sparked a selloff in bonds, sending yields on the 10-year Treasury note above 4.7% for the first time this year. U.S. stocks fell, meanwhile, with the Dow Jones Industrial Average sliding more than 600 points in morning trading.

The report did show, however, that American consumers are still strong after years of hiring and wage growth. Spending on healthcare, insurance and other services continued to grow, the Commerce Department said. Measures of underlying demand remain robust.

“The domestic economy is doing well,” said Eugenio Alemán, chief economist at investment firm Raymond James. “Prices were a little bit over the top, but not by much.”

A slowdown in spending on goods such as cars and gasoline, weighed down overall growth. Shifts in business inventories and international trade also slowed last quarter’s expansion, but economists cautioned that those figures can vary widely throughout the year.

“A decrease in inventories can be really good news for the economy,” said Teresa Ghilarducci, an economics professor at the New School for Social Research in New York City. “That bodes well for a spurt of investment next quarter.”

“It’s way too soon to mourn for the economy,” she added.

But Thursday’s report also suggests inflation, using the Fed’s preferred gauge, was likely firmer than expected in March—and economists had already revised up their expectations for price pressures in March after a separate inflation report earlier this month.

Excluding volatile food and energy prices, the personal-consumption expenditures price index rose 3.7% in the first quarter at an annualized rate, which was above expectations of a 3.4% increase.

The increase implies that price pressures were stiff again in March and that brisk inflation readings for January and February may get revised higher when the Commerce Department releases its March inflation figures on Friday.

Thursday’s snapshot comes after a string of federal data in recent weeks suggested that the American economy keeps powering through the highest interest rates in 23 years.

So far in 2024, employers around the country have added staff at rates outpacing Wall Street’s projections. An influx of immigrants is boosting growth and tax revenues, economists say, even as it strains some governments’ resources. Credit card companies have recently reported that customers are spending more than they did last year.

That has translated to optimism for many businesses as earnings season kicked into high gear this week. GM upgraded its profit guidance after strong demand for gas-powered trucks and sport-utility vehicles propelled year-over-year growth in first-quarter retail sales. Lockheed Martin said it is cranking out new missiles, air-defense systems and space hardware in part to fill a backlog from wars in Ukraine and the Middle East.

Some industries have also continued to shell out for data centers, factories and other capital-intensive projects around the country despite higher borrowing costs. Earlier this week, steel producer Nucor said that it would boost such spending this year with investments in mills in West Virginia and North Carolina.

“On a macro level, the U.S. economy appears to demonstrate near-term resilience,” Chief Financial Officer Steve Laxton told analysts.

But the continuing growth has also contributed to persistent price pressures that have raised the prospect that inflation might settle closer to 3% than the Federal Reserve’s 2% goal.

Plateauing inflation in recent months has exacerbated a knotty election-year issue for President Biden despite a promising economic outlook. At the same time, investors’ rate-cut expectations have been upended, slamming the artificial-intelligence-oriented tech stocks that propelled a market rally in recent months.

There are once again signs, though, that the economy is cooling. Low-income Americans are saving far less than they did prepandemic. Mortgage rates recently bounced back above 7%, leading home sales in March to post their biggest monthly drop in more than a year. Average hourly earnings in March rose at their slowest annual pace since June 2021.

Many economists still believe that those cracks will widen—slowing inflation—if and when the labor market loosens.

Nick Timiraos contributed to this article.

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