The U.S. economy grew steadily but less robustly than anticipated during the first quarter of this year, the government reported on Thursday, while inflation added momentum that may be worrisome for Federal Reserve (search) policymakers.

The Commerce Department (search) said gross domestic product (search), or GDP, that measures total output within U.S. borders expanded at a 4.2 percent annual rate in the January-March three-month period — well under the 5 percent rate forecast by Wall Street economists.

It followed growth at rates of 4.1 percent in the fourth quarter and a sizzling 8.2 percent in the third quarter last year.

But a key measure of inflation pressures based on personal consumption expenditures — the PCE price index excluding food and energy that Fed Chairman Alan Greenspan (search) is known to monitor — virtually doubled. The price gauge climbed at a two percent annual rate after gaining 1.2 percent in the fourth quarter and 1 percent in the third quarter.

The Fed's policysetting Federal Open Market Committee (search) is scheduled to meet next Tuesday amid growing indications the U.S. central bank is readying financial markets for higher interest rates, possibly later this year, to keep inflation in check as the economic expansion from the 2001 recession continues to gain strength.

The central bank is not expected to raise rates next week. However, it is likely to announce after Tuesday's meeting that it now sees economic risks balanced between rising prices and slower growth in the period ahead, effectively laying the groundwork for a future rate rise.