Economic growth was slower at the end of 2025 than data first showed and inflationary pressures persisted at the start of this year, a troubling snapshot of an economy on unsteady footing before war with Iran upended oil and financial markets.
Consumer prices increased moderately in January, the Federal Reserve’s preferred inflation gauge showed on Friday. Economists worry prices will march even higher in the coming weeks. And gross domestic product, the benchmark measure of economic growth, which is adjusted for inflation, was revised down to a 0.7% annual pace for the last three months of the year.
The personal consumption expenditures price index, the Fed’s preferred inflation gauge, notched a 0.3% monthly increase in the first month of 2026. Compared with the same time last year, prices were up 2.8%. The “core” inflation reading, which strips out more volatile food and energy prices, came in at 0.4% on a monthly basis, and 3.1% on an annual basis. That is a full percentage point above the Fed’s 2% target.
“It basically shows that inflation firmed up to start the year,” Omair Sharif, founder of the research firm Inflation Insights, said of the data. “All the key measures are moving in the wrong direction.”
A snapshot taken just before the shock to oil prices from the war with Iran, the price data offer a worrisome setup for inflation going forward.
After peaking at over 9% on an annual basis in 2022, inflation cooled off by 2024, gliding just above the Fed’s 2% target. Since 2025, though, the inflation picture has worsened. Goods inflation, which had been slowing for years, has swung back up in various categories since President Donald Trump announced tariffs last spring. Some of those tariffs have been struck down by the Supreme Court. Others, though, remain in place, and have led businesses to toggle between absorbing the increased cost of imports and passing along those new costs to consumers.
According to analysts at Employ America, a research group that tracks employment and price data, tariffs are an “obvious culprit” of some excess inflation, especially in apparel and furniture. But they note that shortages stemming from the artificial intelligence boom are also playing a part in price rises. Computer accessories and tech equipment, for instance, are experiencing abnormal cost increases compared with averages in recent years.
Inflation in health care services, a major part of the economy, continues to play a role in hotter prices too. This personal consumption expenditures index released Friday has been running slightly hotter than the more commonly cited consumer price index. That divergence is largely the result of the fact that the CPI weighs housing inflation more heavily, and the rate of increases in rent has slowed alongside the overall economy.
Regardless, both inflation measures are likely to tilt higher next month once the inflationary impacts of higher oil prices are felt. The price of West Texas Intermediate crude, the U.S. benchmark, has risen to around $90 a barrel from $60 levels in February. Airfares, gasoline prices and restaurant costs are all expected to be affected.
Despite all of the sobering news weighing on consumer sentiment and financial markets, consumption levels in January indicate that the economy is growing.