A rising dollar coupled with the end of stimulus checks helped push the U.S. economy into the negative territory in the first quarter of 2022, as March inflation remained elevated. If this trend continues for another quarter, the American economy will be officially in stagflation, a situation of slowing economic growth and soaring inflation.

The Gross Domestic Product (GDP), a measure of the nation’s output, declined at an annualized rate of 1.4%, following a 6.9% rise in the previous quarter, the Bureau of Economic Analysis (BEA) said this week.

The surprise decline in Q1 GDP was driven by a couple of things like trade, one of the four components of GDP. Exports dropped by 5.9%, while imports surged by 17.7%, meaning that trade was a more significant drag on the GDP than the previous quarter. Thanks to a stronger dollar, which made American products more expensive to the country’s trade partners, while it made the products of those partners less costly to Americans.

“The decline marked by today’s GDP report is another sign that the U.S. economy is likely in the late stage of its current expansion,” Mike Reynolds, Vice President of Investment Strategy at Glenmede, said to International Business Times. “With U.S. GDP running closer to potential than it did just a few months ago, each marginal unit of economic growth becomes incrementally more challenging to achieve, especially given the ongoing global disruptions from war and supply chain bottlenecks.”

Then there’s the continuing decline in government spending, another component of GDP, down 2.7% following a 2.6% decline in the previous quarter. This is thanks to the expiration of stimulus checks.

Meanwhile, the Personal Consumption Expenditure Index (PCE), a measure of how inflation affects consumer spending, rose to 6.6% in March, up from 6.3% in February. Thanks to a 33.9% rise in energy prices and 9.2% in food prices. Core PCE, which excludes food and energy, the PCE rose at an annual rate of 5.2%, meaning that inflation continues to be a food and energy problem.

Still, there was a silver lining in the GDP report, consumer spending, the most significant component of the GDP, grew at an annual rate of 2.7%. Due to solid job growth this helped Americans replace the loss of income from the expiration of stimulus checks.

“I think we’re seeing a normalization of the economy rather than a step back. In the face of the Omicron variant, supply challenges, and high inflation, both consumer and business spending were strong,” David Wilkinson, President & G.M., NCR Retail, the retail division of NCR Corporation, told IBT. “This should pave the way for continued economic growth as consumers have shown a desire to shop, both online and even more so in person, as they appear hungry for new in-store experiences which businesses are investing in significantly.”

But robust consumer spending may not last as rising food and energy prices begin to take their toll on American consumers.

“Reported almost a full month after the end of the quarter, GDP tends to be a relic of the near-past in a fast-paced economy,” added Reynolds. “Looking ahead, investors should turn their attention to next week’s FOMC meeting and jobs report, which should provide more timely assessments of unfolding economic trends and policy.”

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