The Commerce Department reported that economic growth in the final quarter of 2025 was significantly below expectations, while core inflation experienced an uptick at the beginning of 2026. Gross domestic product, which quantifies the total output of goods and services within the extensive U.S. economy, experienced a seasonally and inflation-adjusted annual growth rate of merely 0.7% in the fourth quarter, as reported. The initial revision of the GDP reading marked a significant decline from the earlier estimate of 1.4%, falling short of the consensus forecast of 1.5%. The data indicates a significant deceleration from the previous period’s 4.4% increase, adversely affected by an unprecedented government shutdown that resulted in a 16.7% decline in government expenditure. For the full year, GDP recorded a 2.1% increase, which is one-tenth of a percentage point lower than the prior reading. In 2024, the economy expanded at a rate of 2.8%. The BEA indicates that the downward revision resulted from modifications in consumer and government expenditure as well as exports. A reduction in imports, which conventionally detracts from GDP, was also revised downward from the prior estimate. Consumer spending increased by 2% for the quarter, subsequent to a downward revision of 0.4 percentage points, which indicated a decrease from the 3.5% rise observed in the third quarter. The primary factor behind the downward revision stems from services, particularly expenditures in health care, as indicated in the release.

In terms of inflation, the January readings largely aligned with expectations, yet they indicated that price increases are significantly outpacing the Federal Reserve’s preferred levels. The personal consumption expenditures price index, which serves as the Federal Reserve’s main forecasting instrument for inflation, recorded a seasonally adjusted increase of 0.3% for the month, resulting in an annual rate of 2.8%. Economists surveyed by Dow Jones anticipated respective readings of 0.3% and 2.9%. Excluding the more volatile categories of food and energy, the core PCE inflation experienced an increase of 0.4% in January, resulting in a year-over-year rise of 3.1%. Federal Reserve officials are increasingly prioritizing the core reading as a more accurate reflection of long-term trends. The core reading registered an increase of 0.1 percentage point compared to December. A separate report from the Commerce Department indicated that orders for durable goods, including transportation equipment, appliances, and computers, remained unchanged in January. This outcome fell short of the anticipated 1.3% increase, although it represented an improvement over the 0.9% decline recorded in December. Orders increased by 0.4%, excluding transportation.

“The significant downward adjustment in GDP serves as a critical assessment ahead of this energy crisis, heightening the likelihood of stagflation,” stated David Russell. “The soft January durable goods data also suggests the economy entered this crisis weaker than anticipated. This presents difficulties for investors, as PCE inflation continues to exceed the Fed’s target significantly. While the figures may be outdated, they still offer a glimpse into inflationary pressures and economic expansion as we approach the Supreme Court ruling that nullifies a significant portion of President Donald Trump’s tariffs implemented under the International Emergency Economic Powers Act. It is widely accepted among economists that tariffs have contributed approximately half a percentage point or slightly more to inflationary trends. The report also precedes the attacks launched by the U.S. and Israel against Iran on February 28. Energy prices have experienced a significant increase in the nearly two weeks since the onset of the conflict, with the Brent crude international benchmark reaching $100 a barrel on Thursday. The inflation data indicates that the inflation landscape was already concerning prior to the onset of the Middle East crisis, according to Sonu Varghese. “An existing significant challenge for the Federal Reserve is poised to escalate, and it is probable that the Fed will refrain from cutting rates in 2026 and may even begin discussions regarding rate hikes later this year.”

In January, personal income and spending both saw an increase of 0.4%, which contrasts with the estimates of 0.5% and 0.3%, respectively. The personal saving rate increased by half a percentage point, reaching 4.5%. In the GDP report, a measure of demand referred to as private sales to private domestic purchasers rose by only 1.9% in Q4, revised down by 0.5 percentage points and a full percentage point lower than the previous quarter. Federal Reserve officials closely monitor the PCE gauge, viewing it as a more comprehensive measure of inflation compared to the consumer price index. They utilize the private sales metric as an indicator of overall economic activity. Earlier this week, the Bureau of Labor Statistics reported a February headline CPI rate of 2.4% and core at 2.5%, the latter being the lowest reading since March 2021, though still above the Fed’s 2% target. The central bank is set to announce its forthcoming rate decision on Wednesday. Markets are indicating an almost certain probability that the rate-setting Federal Open Market Committee will maintain its current stance.