WASHINGTON, Aug 30: The US economy performed a little better than first thought in the second quarter, but growth is still flagging while inflation rises, a government report showed on Wednesday.

The Commerce Department said the gross domestic product (GDP) of the world’s largest economy grew at an annualised rate of 2.9 per cent in the three months to June 30, up from an initial estimate of 2.5 per cent.

The figure was just under Wall Street’s consensus forecast of 3.0 per cent.

Growth fell sharply from a 5.6 per cent pace in the first quarter and was the weakest since the final quarter of 2005.

The department reiterated that compared to the first quarter’s booming pace, US consumers had cut back their spending on durable goods while companies had trimmed their investment in equipment and software.

On the inflation side, the Commerce Department left its first estimate for the index of personal consumption expenditures (PCE) unchanged at 4.1 per cent in the second quarter.The core PCE rate, excluding food and energy costs, was revised down a notch to 2.8 per cent from 2.9 per cent, after rising 2.1 per cent in the first quarter. It was still the rate’s fastest pace of growth in more than five years.

The core PCE level is the Federal Reserve's preferred gauge of inflation.

The US central bank this month called off a long-running campaign of interest rate hikes for fear of choking off the flagging economy.

But the evidence of persistent price pressures could worry the Fed as it seeks to quell inflation without killing growth.

Other data published Wednesday by private research groups showed that mortgage applications fell in the week ended August 25 to their lowest level since November 2003, while private-sector non-farm payrolls were again weak in August.

“The latter two developments warn of a fundamental slowing of the economy that ought to continue through 2007,” Moody's Investors Service economist John Lonski said.—AFP