The Fed's favorite measure of inflation rose at the fastest pace in nearly two years

U.S. economic growth in the last three months of 2025 was much slower than expected, while core inflation rose, data from the U.S. Bureau of Labor Statistics (BEA) showed.

- U.S. real gross domestic product (GDP) in the fourth quarter of 2025 grew at a seasonally and inflation-adjusted annualized rate of just 0.7%, according to a revised BEA estimate. This is significantly lower than the 4.4% growth in the third quarter of last year and slower than the consensus forecast of economists surveyed by Dow Jones, who expected to see the figure grow at 1.5% at the end of 2025, CNBC writes. The revised estimate was due to weaker-than-expected performance in exports, consumer spending, government spending and investment, CNBC points out. At the end of 2025, the U.S. economy grew by 2.1%. In 2024, it added 2.8%.

- The Core Personal Consumption Expenditures Index (Core PCE), which does not take into account volatile food and energy prices and is therefore the US Federal Reserve's preferred indicator, meanwhile rose by 3.1% year-on-year in January and by 0.4% month-on-month, according to data from the US Bureau of Labor Statistics. The year-on-year increase in the Core PCE index in January was slightly above the FactSet consensus, which had suggested a 2.9% increase, Barron's wrote, noting that the actual January Core PCE reading was the highest since the spring of 2024. The overall PCE index rose 2.8% year-over-year, in line with economists' forecasts, Barron's reports.

U.S. stock futures are growing on the back of lower oil prices. In particular, futures on Dow Jones, S&P 500 and Nasdaq 100 after the publication of macroeconomic data rose by 0.4%. At the same time, the three major U.S. stock indexes are moving to decline at the end of the week. The S&P 500 may lose about 1%, which would be its first series of three-week declines in about a year, CNBC notes. Dow Jones is close to a weekly decline of 1.7%, Nasdaq 100 is losing about 0.3% since the beginning of the week.

Data on US GDP for the last three months of 2025 and personal consumption expenditures in January in the States show that inflation in America remains markedly above the Fed's 2% target, Barron's notes, pointing out that for Fed officials this strengthens the case for keeping interest rates at current levels.At the same time, the latest macroeconomic reports largely reflect the situation in the past, showing the state of the U.S. economy more than a month ago, even before the conflict over Iran triggered a jump in oil prices, Barron's notes, emphasizing that all this may also strengthen the energy component of inflation in the coming months.The Fed's approach in such situations often boils down to the principle: "if in doubt, ignore short-term price spikes," the publication points out: therefore, the January data will probably not have a significant impact on the Fed's upcoming monetary policy decisions, Barron's writes.

Most economists still believe that the rise in oil prices due to the war in Iran will not have a significant impact on the cost of other goods and services in the U.S., the publication notes. This view, in particular, is held by Morgan Stanley economists. In their opinion, the oil shock can significantly increase the overall inflation rate, but will almost not affect the core PCE.

"The latest data on personal consumption expenditure inflation show that the inflation situation looked unfavorable even before the crisis in the Middle East. Core inflation - Core PCE - now stands at 3.1%, its fastest pace in nearly two years, and it is likely to continue rising as the energy shock begins to be reflected in prices," said Carson Group chief macroeconomic strategist Sonu Varghese. His commentary is published by MarketWatch.

The U.S. Federal Open Market Committee (FOMC) of the U.S. Federal Reserve will make its next interest rate decision on March 18.

Before the release of data on personal spending and U.S. GDP, traders, according to the market sentiment monitoring tool FedWatch, estimated the probability of maintaining the interest rate at the current level following the Fed meeting on March 18 at 99.2%. The indicator did not change after the release.

This article was AI-translated and verified by a human editor