Although the core economic metrics continued to move forward at a relatively steady pace, economic growth in the U.S. slowed in the second quarter, short of expectations. Meanwhile, inflation was sticking firmly above the central bank’s target on Thursday as the Department of Commerce’s report made it difficult for the monetary policy path.

Gross domestic product (GDP) expanded at just a 1.5% annualized rate from April through June. The data, which has been seasonally and inflation adjusted by the Bureau of Economic Analysis, was below the 1.8% growth rate projected by economists, and was a deceleration from the 2.1% gain in the first quarter.

The mixed economic data comes a day after a split Federal Reserve panel decided to keep its benchmark borrowing rate in a 3.5%-to-3.75% range. Policymakers continue to be intensely preoccupied with inflation, with three regional presidents raising the issue of high prices, and noting that inflation has not come down to the central bank’s 2% target.

After the report came out, stock market futures were up and yields of the U.S. Department of the Treasury tumbled.

Underlying Demand Remains Solid Despite the Headline Miss

The bottom line GDP number was a disappointment, but most of the decline was due to a large drop in inventories as well as a decline in U.S. government spending on its federal level of 0.3%. A few sectors of the economy showed good strength and progressed further.

The jump in personal spending was 2.1%, a much greater increase than the 0.4% increase recorded in the first quarter. Moreover, final sales to domestic private purchasers, an important gauge of underlying economic demand, rose a solid 3.9%.

Inflation continued to pull back slightly with the personal consumption expenditures (PCE) price index declining 0.1% in the month to post an annual rate of 3.7%. The Fed’s preferred long-term measure, excluding volatile food and energy prices, jumped 0.1% in the month, and 3.3% annually, in Core PCE.

But this measure of inflation was right on track, and still higher than the Fed’s 2% target. That helped a bit on the energy front, which fell 5.9% in June, as a brief respite from Middle East warfare helped keep prices from rising in June, alongside a 9.2% decline in gasoline prices.

Inflation also slowed a bit in housing (+0.2%). Goods prices fell 0.6% as services rose only 0.1%.

Despite the solid spending numbers, consumers are feeling the financial pinch. Personal income increased 0.2% for the month, which was less than anticipated, while personal expenditures increased 0.3% for the month. As a result, Americans are cutting back on their personal savings and are now saving at the lowest level in four years, 2.7%.