Thursday’s report on economic activity delivered the latest in a series of rude awakenings to investors and Federal Reserve policymakers who have held their breath in anticipation that lower inflation would allow interest-rate cuts to begin in earnest this summer. Instead, Commerce Department data showed that, for the third straight month, inflation was proving stickier than expected after an immaculate cooling in the second half of last year. Individual readings on growth and prices so far this year haven’t been enough on their own to dramatically change the outlook for the Fed. But the cumulative effect of those serial disappointments has been notable. In particular, inflation data has consistently been firmer than expected, with recent months getting revised somewhat higher in subsequent reports. This trend has led investors and Fed officials to rethink whether rate cuts will be appropriate this year.

Policymakers and financial-market participants began the year broadly expecting slower growth and cool inflation would allow the Fed to begin rolling back interest-rate hikes. But the opposite has occurred. Growth has proven more resilient than expected, and inflation has been surprisingly firm. On Thursday, the Commerce Department reported that gross domestic product expanded at a 1.6% seasonally- and inflation-adjusted annual rate, but a broader measure of underlying demand ran closer to 3%, suggesting solid momentum. Meanwhile, inflation was stronger-than-expected during the first quarter. Core prices, which exclude volatile food and energy items, rose at a 3.7% annualized rate during the quarter and were up 2.9% from a year ago, according to the personal-consumption expenditures price index.

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