US economic growth slowed well below expectations in Q4, inflation remains elevated

US gross domestic product increased at a 1.4% y/y in the last three months of 2025, after the economy grew by 4.4% in the third quarter, while the Q4 data also strongly disappointed forecasts for 2.8% increase.

Much stronger than expected slowdown in US economic growth in the fourth quarter was mainly driven by disruptions from last year’s government shutdown and a moderation in consumer spending, but negative impact was expected to be partially offset by tax cuts and investment in artificial intelligence in coming months.

The GDP report, which was delayed by the record government shutdown, pointed to a jobless economic expansion as well as the situation in the economy in which upper-income households are doing well and strongly contribute to consumer spending, while lower-income consumers are struggling amid high inflation from import tariffs and stalling wage growth.

The separate report showed that Personal Consumption Expenditures (PCE) inflation rose by 2.9% in December, compared to 2.8% increase previous month, while core PCE, stripped out for volatile food and energy components, increased by 3% in December from 2.8% in November.

Both indicators exceeded forecasts, adding to signals that underlying price pressures persist.

The PCE is Fed’s preferred inflation gauge and December’s data contribute to fresh hawkishness in view in monetary policy after the minutes of FOMC last meeting showed division between the policymakers, as talks about two rate cuts in 2026 started to fade, while some policymakers returned to narrative of potential rate hikes, in growing concerns about elevated inflation.