The U.S economy was a bit shakier heading into the war with Iran than previously thought, according to new government data published Friday.
Economic growth was considerably slower at the end of 2025 than initial estimates indicated, the Commerce Department announced. The revised data show that the economy grew by just 0.7% in the fourth quarter, half the initial estimate of 1.4% and well below expectations of 1.5%.
The annual growth rate was revised lower, as well, with gross domestic product expanding by 2.1% in 2025, a tenth of a percentage point lower than previously reported. The economy grew at a 2.8% rate in 2024.
The downward revision was driven by the sharp downturn in government spending connected to the weeks-long shutdown that began in October. Consumer spending and investment were a bit weaker than first estimated, and exports fell by a greater degree.
Prices still rising: In addition to slower growth at the end of last year, inflation appears to have heated up at the start of this year.
According to a separate Commerce report, the core Personal Consumption Expenditures price index — a measure of inflation that strips out volatile food and fuel prices — ticked higher to 3.1% on an annual basis in January, a tenth of a point higher than in December and well above the Federal Reserve’s 2% target. The full PCE index moved a tenth of a point lower to 2.8%, but the core rate is seen by many analysts, including those at the Fed, as the most accurate indicator of the underlying inflation trend.
What analysts are saying: Both reports released Friday cover data that was collected before the U.S. and Israel launched a new war with Iran, raising concerns that the economy could be in for a rough patch once higher energy prices begin to affect consumers and businesses. The average price of a gallon of gasoline rose to $3.63 nationally Friday, according to AAA, up from $2.94 a month ago. If the trends of higher costs and severely anemic growth persist, a period of stagflation — in which unemployment and prices rise at the same time — becomes a real threat.
Omair Sharif of the research firm Inflation Insights said that the latest data is not encouraging. “All the key measures are moving in the wrong direction,” Sharif told The New York Times.
The January inflation numbers represent “the calm before the storm,” said Joseph Brusuelas, chief economist at RSM. In a research note, he wrote that he expects the topline inflation rate to rise to 3.5% or higher, driven by a combination of persistent pricing pressure in the service sector and rising energy costs.
Diane Swonk, chief economist at KPMG, also warned of higher inflation. “Underlying inflation pressures were already rising ahead of the war in the Middle East and are set to intensify,” she said, per the Associated Press.
The rising risk of inflation, and with it stagflation, suggests that the Fed will be extremely cautious when it reviews interest rate policy at its meeting next week. “The Fed is now looking at an environment where inflation remains sticky and will soon get an energy-fueled boost, while GDP growth and the labor market continue to lose momentum,” said Bret Kenwell, an analyst at eToro, per Fox Business. “That is not an easy setup for aggressive rate cuts unless the economy shows clearer signs of meaningful deterioration.”