U.S. Growth Slows Sharply as Inflation Remains Elevated

The U.S. economy slowed significantly in the final months of 2025 while inflation remained stubbornly elevated at the start of 2026, according to new data released by the U.S. Department of Commerce.

Revised figures from the government show that gross domestic product grew at an annualized rate of just 0.7% in the fourth quarter, sharply lower than the previous estimate of 1.4% and well below economists’ expectations of roughly 1.5%. The slowdown marks a steep drop from the 4.4% growth rate recorded in the third quarter and suggests that economic momentum faded toward the end of the year.

For the full year, the U.S. economy expanded by 2.1%, slightly lower than earlier estimates and down from the 2.8% growth recorded in 2024. According to the Bureau of Economic Analysis, the downward revision was driven by weaker consumer spending, lower government outlays, and adjustments to export and import data.

Consumer spending, which accounts for the largest share of economic activity, grew at a 2% pace during the quarter, a noticeable slowdown from the 3.5% growth seen in the third quarter. Much of the revision came from weaker services spending, particularly in healthcare.

At the same time, inflation data showed that price pressures remain well above the Federal Reserve’s 2% target. The personal consumption expenditures price index, the Fed’s preferred inflation measure, rose 0.3% in January, bringing the annual rate to 2.8%. When volatile food and energy prices are excluded, core PCE inflation rose 0.4% for the month and 3.1% year-over-year, slightly higher than the previous reading.

Other economic indicators suggest activity may already have been softening at the start of 2026. Orders for durable goods—items such as appliances, transportation equipment, and computers—were flat in January, falling well short of expectations for a 1.3% increase.

Economists say the data presents a difficult backdrop for policymakers. Slower growth paired with persistent inflation increases the risk of stagflation, a scenario in which the economy weakens even as prices remain elevated.

The economic data also predates two developments that could further complicate the outlook. In recent weeks, energy prices have surged following escalating military tensions with Iran, pushing Brent crude oil close to $100 per barrel.

Meanwhile, the U.S. Supreme Court recently invalidated several tariffs previously imposed under emergency economic powers, policies that economists estimate had been adding roughly half a percentage point to inflation.

The mixed signals leave the Federal Reserve in a difficult position ahead of its next policy decision. Markets widely expect the central bank’s rate-setting Federal Open Market Committee to hold interest rates steady for now, though some analysts warn that persistent inflation could force policymakers to reconsider the possibility of rate hikes later in the year.

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