U.S. Q4 Final GDP Misses Expectations as Growth Slows, While Fed's Key Inflation Gauge Holds Steady Ahead of War

U.S. economic growth slowed more than expected in the fourth quarter of 2025, according to the latest estimate from the Bureau of Economic Analysis. Real gross domestic product expanded at an annualized pace of 0.5%, falling short of the 0.7% forecast and matching the prior estimate. The downward surprise was largely driven by weaker investment, pointing to a loss of momentum heading into year-end. This marks a sharp deceleration from the 4.4% growth recorded in the third quarter.

At the same time, inflation data showed a more stable trend. The Core Personal Consumption Expenditures Price Index (Core PCE), the Federal Reserve's preferred gauge for underlying inflation, rose 0.4% on a monthly basis in February and 3.0% from a year earlier. The reading came in line with expectations and unchanged from the previous month, suggesting that core inflation pressures remained steady.

On a year-over-year basis, the February core reading edged slightly lower from January's 3.1% pace, indicating modest progress in easing inflation. Meanwhile, headline PCE, which includes food and energy, also increased 0.4% on the month, exceeding expectations for a 0.32% gain. Annual headline inflation stood at 2.8%, in line with forecasts.

Importantly, the data largely precedes the escalation of geopolitical tensions tied to the Iran conflict, which began at the end of February. As a result, the report captures minimal impact from the recent surge in energy prices. This context makes the inflation picture more concerning, as it suggests the Federal Reserve was already contending with persistent price pressures before the latest external shock.

Overall, the combination of slowing growth and still-elevated inflation presents a challenging backdrop for policymakers, as the economy shows signs of softening even as inflation remains above target.