US January Core PCE Hits Two-Year High, Q4 Actual GDP Faces "Halved" Downward Revision

U.S. core inflation has risen month-over-month for two consecutive months, yet the economy’s growth in the fourth quarter was sharply revised downward. Amid the dual pressures of soaring oil prices triggered by the Iran conflict and weak consumer spending, the Federal Reserve’s rate cut plans have been completely disrupted.

In recent months, Fed officials have become increasingly concerned about stubborn inflation, and the latest PCE price index reveals the reasons. Prices surged significantly in January, and strong momentum is expected to continue in February.

Due to the recent federal government shutdown, the government delayed releasing the report for several weeks, which was finally published on Friday. The report shows that the so-called PCE index increased by 0.3% month-over-month in January, in line with Wall Street expectations; year-over-year, it slightly declined from 2.9% to 2.8%.

The Fed aims to bring the annual inflation rate down to 2% or lower, but there is still a considerable gap to close.

The core PCE inflation rate, excluding food and energy, rose more strongly, increasing by 0.4% month-over-month; year-over-year, it increased by 3.1%, up from 3.0% in the previous month. Core PCE, which removes the more volatile food and energy prices, is considered the best indicator for predicting future inflation.

Following the announcement, spot gold prices remained relatively stable. Traders are betting that the Fed will cut rates before September.

It is expected that the PCE index for February will show a similar increase. Notably, these figures have not yet incorporated the recent surge in oil prices caused by the Iran conflict.

Rising oil prices could push inflation levels higher in March and beyond, depending on how long the conflict persists. Therefore, the Fed may delay further rate cuts until oil prices fall back.

U.S. financial website investinglive states that this report poses a problem for dovish members of the Fed. Overall data largely met expectations, but a closer look shows that the core PCE has recorded a 0.4% month-over-month increase for two consecutive months. If similar data appear for several more months, inflation could quickly approach 2%, and these figures will still be included in year-over-year calculations over the next 10 months. Additionally, energy price shocks are imminent.

U.S. Q4 GDP

According to the U.S. Bureau of Economic Analysis, the measure of all goods and services in the large U.S. economy—Gross Domestic Product (GDP)—was seasonally and inflation-adjusted, with an annualized real growth rate of only 0.7% in the fourth quarter.

This initial GDP revision was significantly lowered from the previous estimate of 1.4%, and it was well below the 1.5% consensus forecast from Dow Jones surveys. Compared to the 4.4% growth in the previous period, this indicates a substantial slowdown in economic activity.

For the full year, 2025 GDP grew by 2.1%, down 0.1 percentage points from earlier estimates. In 2024, economic growth was 2.8%.

Also released was U.S. consumer spending for January, which increased slightly more than expected, and with core inflation remaining resilient and the Middle East war dragging on, economists believe the Fed is unlikely to resume rate cuts in the near term.

The U.S. Bureau of Economic Analysis stated on Friday that consumer spending, which accounts for more than two-thirds of economic activity, increased by 0.4% in January, matching the previous month’s gain. The war between the U.S., Israel, and Iran has pushed oil prices higher, potentially impacting consumer spending.

The conflict has also caused stock market volatility, and economists warn that wealth erosion among high-income households could force some families to cut back on spending. Low-income households have already reduced spending due to higher import tariffs raising the prices of goods. Economists expect this drag to impact the economy into the second quarter.