The U.S. economy grew slightly faster than previously estimated in the first quarter, but still at the weakest pace in more than four years and inflation was higher as well, data on Thursday showed.

First-quarter gross domestic product expanded at an annual rate of 0.7 percent, the smallest gain since the fourth quarter of 2002, the Commerce Department said. That marked an upward revision the department's prior 0.6 percent estimate.

At the same time, a key gauge of nonfood, nonenergy inflation monitored closely by the Federal Reserve rose at a 2.4 percent pace, not the more-subdued 2.2 percent rate that had been thought earlier.

The data came only hours ahead of a decision by the Fed to hold benchmark interest rates steady at 5.25 percent. In announcing its decision, the Fed said it remained concerned about inflation, even as it took note of an easing in core prices since the first quarter.

U.S. government bond prices slipped on the announcement, as traders saw less likelihood the central bank would lower borrowing costs later in the year. U.S. stocks ended the day nearly flat and the dollar was steady against the euro.

There's no reason to expect interest rates to move much from here, said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey.

A Reuters poll of 17 top bond firms found that nine expect the Fed's next move to be a cut in interest rates, while five see a rate hike somewhere down the road.

JOB MARKET LOOKS STRONG

The Fed expressed concern the economy's high level of resource utilization -- such as its tight labor market -- could sustain inflation pressures.

The U.S. unemployment rate held at a low 4.5 percent in May and data on Thursday suggested the job market remains tight.

The Labor Department said the number of workers lining up to seek an initial week of jobless benefits fell by 13,000 last week to 313,000. That level was slightly lower than Wall Street expected and was taken as a sign of labor market strength.

But layoffs linked to auto retooling shutdowns typical in the summer months could skew the labor picture in coming weeks, making it harder to discern where the economy is heading.

We won't have a clear idea of any change in the trend in claims until the end of July, said Ian Shepherdson, chief U.S. Economist at High Frequency Economics in Valhalla, New York.

While slightly stronger than the government's earlier reading, the increase in first quarter GDP was a tad weaker than the 0.8 percent growth economists were expecting.

The first quarter slowdown came as businesses sold off inventories even though consumer spending remained strong.

Businesses cut inventories at a $4.2 billion annual rate during the quarter, slightly less than the $4.5 billion annual rate in the previous estimate but still big enough to pull growth down during the quarter.

Imports increased at a 5.5 percent rate, slightly lower than the 5.7 percent estimate a month ago, but still a factor that weighed on growth. Exports, however advanced at a 0.7 percent rate, a reversal from the 0.6 percent contraction in the previous estimate.

Consumer spending, which fuels two-thirds of national economic activity, rose at a 4.2 percent rate, slightly lower than the 4.4 percent estimated a month ago but still a strong underpinning to keep the economy growing.

(Additional reporting by David McMahon in New York and Mark Felsenthal in Washington)

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