WASHINGTON, May 26 (Xinhuanet) -- US economy increased at an annual rate of 3.5 percent in the first quarter of this year, higher than the rate of 3.1 percent announced last month, the Commerce Department reported on Thursday.

    The gain followed a rate of 3.8 percent in the last quarter of 2004 and a gain of 4.4 percent for the full year.

    The report showed that consumer spending, which accounts for about two thirds of the total gross domestic product and is the major force in pushing the economy forward, grew 3.6 percent in the first quarter. That was up a bit from the initial estimate of 3.5 percent reported last month but down from the fourth quarter's4.2 percent.

    Business investment in equipment and software increased 5.6 percent in the first quarter. That was down from a previous estimate of 6.9 percent and marked a big deceleration from the hot18.4 percent of spending seen in the fourth quarter.

    The change in private inventories added 0.78 percentage points to the first quarter change in real GDP after adding 0.46 percentage points to the final quarter change.

    The exports of goods and services increased 7.2 percent in the first three months compared with an increase of 3.2 percent in the previous quarter, while imports grew 9.1 percent compared with an increase of 11.4 percent in the previous quarter.

    The deficit shaved nearly 0.7 percentage points off US GDP in the first quarter, compared with an initially estimated 1.49 percentage-point reduction reported last month.

    The report also said that core inflation, surge in prices excluding volatile items of food and energy, rose at a rate of 2.2percent in the first quarter. It represented a pickup from the 1.7 percent in the fourth quarter.

    The US Federal Reserve has raised short-term interest rates eight times since June of last year and pushed the US federal fundrate to 3 percent in a bid to curb inflation. Many US economists have forecast that the US Fed will further raise short-term interest rates this year to keep inflation in check. Enditem