THE US economy slowed to its weakest growth rate in nearly two years during the last quarter, hit by a record trade deficit and slowing consumer spending.

The annualised growth rate of 3.1 per cent in the fourth quarter was well below economists’ forecasts of 3.5 per cent and down from a 4 per cent rate of growth in the third quarter.

The weak figures, coupled with signs that inflation was picking up rapidly, dealt a blow to the White House at a time when President Bush is attempting to overhaul the American pension system while reining back the Government’s soaring deficits.

The Commerce Department figures also showed that GDP over the whole of last year grew at 4.4 per cent, the strongest pace since 1999, to reach $11.7 trillion (£6,200 billion). John Snow, US Treasury Secretary, said that the data “underscored the health of US demand and the need for our trading partners to adopt policies that accelerate economic growth”.

US consumer spending, which drives about two thirds of the growth of the world’s largest economy, increased at a 4.6 per cent annual rate, down from a rate of 5.1 per cent in the third quarter. Despite a weaker dollar, international trade dragged down GDP. Exports of US-made goods and services declined 3.9 per cent, the biggest drop in two years. Meanwhile imports increased 9.1 per cent.

The net trade balance subtracted 1.7 percentage points from growth, the largest drag in more than six years.

Nariman Behravesh, chief economist of Global Insight, said: “It’s sort of a back to the future report because we are back in a situation where domestic demand is growing strongly, at 4.7 per cent, but GDP is only 3.1 per cent. The difference is trade.”

Core inflation, as measured on an index of personal spending minus food and energy, which is closely watched by the Federal Reserve, rose at 1.6 per cent, nearly double the 1.9 per cent pace of the previous quarter.

The news strengthened market expectations that the Federal Reserve would raise interest rates on Wednesday for the sixth time since June. The weaker than expected quarterly growth data hit the Dow Jones industrial average, which fell 40.20 points to close at 10427.20.

But bond prices rallied as investors sought a safer haven, prompted by concern over the GDP figures and worries about the outcome of the weekend elections in Iraq.

Meanwhile, Brent crude fell $1.69 to $47.15 per barrel after Sheikh Ahmad Fahd al-Sabah, the president of Opec, which meets tomorrow, said that the cartel did not expect to make any quota changes at its next meeting.