The US economy recorded a very weak growth in the fourth quarter of 2025 at a rate of only 0.7%, far below the original forecast of 1.5%. This drastic slowdown from 4.4% growth in the previous quarter shows that the world’s largest economy is rapidly losing momentum due to reduced consumer and government spending.
Despite the slowdown in growth, inflationary pressures remain high with the core PCE index, the Federal Reserve’s (Fed) favorite measure, rising to 3.1% on an annualized basis. This figure shows that the cost of living is still rising well above the 2% target set by the central bank, thus complicating the prospects for interest rate cuts.
The report reflects the economic situation shortly before the Supreme Court struck down a series of tariffs imposed by President Donald Trump under the International Emergency Economic Powers Act (IEEPA). Economists expect the tariffs to have contributed at least 0.5 percentage points to the current inflation trend.
Economic conditions are expected to become more challenging in March due to the military conflict between the U.S.-Israel and Iran. Brent crude oil prices have surged to $100 a barrel, a development not factored into the January report but which is set to push energy inflation higher.
The combination of near-halt GDP growth (0.7%) and rising core inflation (3.1%) has sparked “stagflation” warnings on Wall Street. The Fed now faces a difficult dilemma of whether to stimulate a sluggish economy or continue to tighten policy to curb the continued rise in commodity prices.
