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2026-02-20 21:37:56
[US Core PCE Rises to 3%, a One-Year High; Q4 GDP Sharply Revised Down to 1.4%] ⑴ The US December core PCE price index rose 3% year-on-year, a new high since February 2025, higher than the market expectation of 2.9%. Month-on-month, core PCE rose 0.4%, also the largest increase since February 2025, exceeding the expected 0.3%. This data shows that inflation stickiness continues to strengthen. ⑵ In contrast to rising inflation, economic growth has slowed significantly. The initial estimate for the annualized quarterly rate of real GDP in the fourth quarter was only 1.4%, a new low since the first quarter of 2025, far below the market expectation of 3.0%. This combination presents complex challenges for the Federal Reserve's policy-making. ⑶ Government spending became a major drag on growth. The fourth quarter saw the fastest decline in federal spending since 1972, with government spending falling at a rate of 5.1%, the largest decline since 2020. The Congressional Budget Office previously estimated that the record 43-day government shutdown cost the quarterly GDP by about 1.5 percentage points. (4) Growth slowed across the board throughout the year. US GDP growth is projected at 2.2% in 2025, down from 2.8% in 2024. This slowdown contrasts with persistently high inflation, reinforcing market concerns about the risk of stagflation. (5) Following the data release, market expectations for the Federal Reserve's policy path will need to be recalibrated. The combination of unexpectedly high inflation and unexpectedly slowing growth complicates policymakers' trade-offs between controlling inflation and stabilizing growth. The interest rate futures market will repric the timing and magnitude of interest rate cuts.
