Economic growth slowed more than expected in the first quarter as higher food and gasoline prices dampened consumer spending, and sent a broad measure of inflation rising at its fastest pace in 2-1/2 years.

But the pull back in output, which was also the result of harsh winter weather, a widening trade gap as well as weak government spending, will probably be fleeting given a firming labor market.

Growth in U.S. gross domestic product -- a measure of all goods and services produced within U.S. borders -- braked to a 1.8 percent annual rate after a 3.1 percent fourth quarter pace, the Commerce Department said on Thursday. Economists had expected a 2 percent growth pace.

We hit a bit of a soft patch in the first quarter, but that should prove temporary because weather was a drag and we got blindsided a bit by a jump in gasoline prices late in the quarter, said Ryan Sweet, a senior economist at Moody's Analytics before the report was released.

The Federal Reserve on Wednesday acknowledged the slowdown in first-quarter growth, describing the recovery as proceeding at a moderate pace -- a slight step back from a statement in March when it said the economy was on a firmer footing.

It trimmed its growth estimate for 2011 to between 3.1 and 3.3 percent from a 3.4 to 3.9 percent January projection.

The U.S. central bank signaled it was in no rush to start withdrawing the massive monetary stimulus it has lent the economy. It confirmed plans to complete its $600 billion bond buying program in June.

Growth in the first quarter was curtailed by a sharp pull back in consumer spending, which expanded at a rate of 2.7 percent after a strong 4 percent gain in the final three months of 2010.

Rising commodity prices meant the households that drive about 70 percent of U.S. economic activity had less money to spend on other items. The report also underscored the pain that strong food and gasoline prices are inflicting on households.

A broader measure of inflation, the personal consumption expenditures price index, rose at a 3.8 percent rate -- its fastest pace since the third quarter of 2008 -- after increasing 1.7 percent in the fourth quarter.

The core index, which excludes food and energy costs, accelerated to a 1.5 percent rate - the fastest since the fourth quarter of 2009 -- from 0.4 percent in the fourth quarter. The core gauge is closely watched by Fed officials, who would like it around 2 percent.

GROWTH WILL TREND HIGHER

Still, economists expect consumer spending to trend higher in the second quarter, mostly on the belief gasoline prices will not rise much above $4 a gallon on average.

Ironically, the labor market, which until recently had lagged the economic recovery that got under way in the second half of 2009, is seen underpinning growth in the coming quarters. Exports are also seen shouldering the recovery.

The economy added 216,000 jobs in March, the most in 10 months and the unemployment rate dipped to a two-year low of 8.8 percent from 8.9 percent in February.

In the first quarter, growth was also curbed by the trade deficit as a need for businesses to rebuild inventories sucked in imports. Export growth slowed.

A widening trade deficit weighs on GDP growth because it shows more U.S. demand being sated by overseas production. Nevertheless, strong import growth has been seen as a sign of underlying strength in domestic demand.

Restocking by businesses picked up pace, with inventories increasing $43.8 billion after a $16.2 billion rise in the fourth quarter. Inventories added 0.93 percentage point to GDP growth. Excluding inventories, the economy grew at a pedestrian 0.8 percent pace, reflecting important pockets of weakness, after a brisk 6.7 percent rate in the fourth quarter.

Business spending on equipment and software gained pace from the prior quarter, but government spending contracted at its fastest pace since the fourth quarter of 1983. Home building made no contribution, while investment in nonresidential structures dropped at its quickest pace the fourth quarter of 2009. However, motor vehicle output added 1.4 percentage point to economic growth last quarter.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

Inflation