The U.S. economy was in worse shape in the weeks before the United States and Israel launched strikes against Iran than earlier government estimates had suggested, according to two closely watched economic benchmarks released Friday, painting a picture of slowing growth and stubborn inflation.
The Commerce Department downwardly revised its estimate of economic growth in the fourth quarter of last year, saying that gross domestic product expanded at just 0.7 percent annual rate in the final three months of 2025, much smaller than the 1.4 percent pace the department had reported in an “advance” estimate last month.
A separate Commerce Department report showed that underlying inflation remained stubbornly elevated in January. The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures price index, rose 2.8 percent over the prior year, a slight decline from December but still well above the Fed’s 2 percent target. More concerning to some economists, so-called core PCE inflation — which strips out volatile food and energy prices and is closely watched as a measure of underlying price trends — ticked up to 3.1 percent in January from 3.0 percent in December.
Both reports predate the conflict with Iran, which has sent oil prices sharply higher, threatening to push up inflation over the coming months. Meanwhile, the downward growth revision suggested that the economy was losing momentum even before the outbreak of hostilities in the Middle East introduced a new source of uncertainty into an already fragile outlook.
The reports complicate the already difficult task for the Federal Reserve as it tries to cool inflation without tipping the economy into recession. Economists warn that rising energy costs could add to inflationary pressures at precisely the moment when growth appears to be flagging — a whiff of the stagflationary period of the 1970s.
“The tone and tenor of this morning’s data deluge screams stagflation,” said Joe Brusuelas, chief economist at RSM.
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