U.S. Growth Slows as Inflation Firms, Reviving Stagflation Concerns
A slowing growth backdrop paired with sticky inflation is reigniting concerns about a mild stagflationary tilt in the U.S. economy — not a recession, but a more uncomfortable mix of decelerating output and persistent price pressures that complicates the Federal Reserve’s policy path.
Real GDP decelerated sharply to a 1.4% annual rate in Q4 2025, well below the 2.8% consensus and down from 4.4% in Q3, even as key measures of inflation remained stuck near 3% and real disposable income stalled, according to the Bureau of Economic Analysis.
The Q4 gain was driven by consumer spending and investment, partly offset by declines in government spending and exports. On a quarter-over-quarter basis, the slowdown reflected downturns in government outlays, exports, and household consumption.
Personal consumption expenditures rose at a 2.4% annual rate, matching expectations but down from 3.5% in Q3, while real final sales to private domestic purchasers eased to 2.4% from 2.9%. For 2025 as a whole, GDP grew 2.2% versus 2.8% in 2024, with the expansion again led by consumer spending and investment.
Price pressures show little sign of fully relenting. The quarterly PCE price index increased 2.9% in Q4, slightly above the 2.8% pace in Q3, while core PCE cooled modestly to 2.7% from 2.9%. For the full year, headline PCE rose 2.6% for a second straight year and core PCE climbed 2.8%, only a tick below 2024’s 2.9%.
December’s monthly data tilted hotter. Headline PCE rose 0.4% month-on-month and 2.9% year-over-year, overshooting consensus and November’s 2.8% print. Core PCE, the Fed’s preferred gauge, also advanced 0.4% on the month and 3.0% year-over-year, up from 2.8% in November.
Household fundamentals look increasingly squeezed. Personal outlays rose 0.4% in December, matching a revised 0.4% pace in November and topping the 0.3% consensus, while nominal personal income and disposable income each increased 0.3%. But once inflation is factored in, real disposable personal income was flat in December after a 0.1% gain in November, and the personal saving rate slipped to 3.6% from 3.7%.
Sub-trend growth, resilient core inflation, and stagnant real income point to an economy losing momentum without yet delivering the disinflation the Fed needs, a mix that keeps stagflation risk on the radar as policymakers weigh further rate cuts.
