U.S. economic growth decelerated sharply in the fourth quarter, falling significantly short of forecasts, while inflationary pressures continued to run high

U.S. gross domestic product expanded at an annual rate of 1.4% in the final quarter of 2025, marking a sharp slowdown from the 4.4% growth recorded in the third quarter. The reading fell well short of expectations for a 2.8% increase, underscoring a more pronounced loss of momentum than analysts had anticipated.

The weaker-than-expected fourth-quarter performance was largely attributed to disruptions stemming from last year’s prolonged government shutdown, alongside a cooling in consumer spending. However, economists expect some of the drag to ease in the months ahead, supported by tax reductions and increased investment in artificial intelligence initiatives.

The delayed GDP report — pushed back due to the record-long government shutdown — also highlighted a “jobless” expansion, reflecting uneven economic conditions. While higher-income households continued to drive consumption, benefiting from resilient asset markets and income gains, lower-income consumers faced mounting pressure from elevated inflation linked to import tariffs and sluggish wage growth.

In a separate release, Personal Consumption Expenditures (PCE) inflation accelerated to 2.9% in December from 2.8% in the previous month. Core PCE, which excludes volatile food and energy prices, rose to 3% from 2.8% in November. Both measures surpassed market expectations, reinforcing concerns that underlying price pressures remain persistent.

As the Federal Reserve’s preferred inflation gauge, the December PCE data added to the increasingly hawkish tone in monetary policy discussions. Minutes from the latest FOMC meeting revealed divisions among policymakers, with earlier expectations of two rate cuts in 2026 beginning to fade. Instead, some officials have revived the possibility of additional rate hikes amid growing unease over sustained inflationary pressures.