The U.S. gross domestic product (GDP) - the most critical measure of the nation’s output in a calendar year - grew at a solid rate of 6.9% in Q4, according to a first estimate released by the Bureau of Economic Analysis. That’s the highest it has been in the last five quarters, and ahead of market forecasts of 5.5%, as the economy switches gears from government-led growth to private-led growth.

The structural change in economic growth is caused by a decrease in federal government spending, led by a decline in defense spending on intermediate goods and services. Also, it is caused by a decrease in state and local government spending reflected in reductions in compensation for state and local government employees, notably education, and in gross investment in new educational structures.

Those declines are more than offset by increases in private inventory in retail and wholesale trade. And increases in exports, led by consumer goods, industrial supplies and materials, and foods, feeds, beverages and travel. Then there’s the increase in personal consumption expenditures (PCE), led by an increase in services, like healthcare, recreation and transportation. PCE is the most significant GDP component and it has an enormous impact on its growth.

“Consumer demand picked up in December despite multiple disruptions from supply chain issues to the COVID resurgence to price hikes,” said David Wilkinson, president & GM at NCR Retail, the retail division of NCR Corporation. “We’re noticing that spending patterns continue to shift with consumers taking a hybrid approach to shopping by purchasing more online followed by curbside pickup. We’ve also seen people buy more online and stock up because essentially you have a bigger virtual basket than you do a physical one in-store.”

And there’s the nonresidential fixed investment-led growth in intellectual property products that was partly offset by a decrease in structures. Still, GDP estimates are more skewed toward the first month of the quarter, meaning that the Q4 report doesn’t fully reflect the impact of the spread of the Omicron variant of COVID-19.

Markets should wait for the second GDP estimate in a month to find out where economic growth was in the last quarter. Meanwhile, higher GDP growth came with elevated inflation. PCE prices rose at a quarterly rate of 6.5% in the fourth quarter of 2021, up from 5.3% in the previous quarter. Core PCE prices rose at a quarterly rate of 4.9% in the fourth quarter of 2021, up from 4.6% in the last quarter.

Elevated inflation makes it very likely that the Federal Reserve will take a more hawkish stance in raising interest rates. But everything could change if the pandemic lingers for much longer, causing downward revisions of U.S. economic growth.