U.S. Economic Growth Slows as Inflation Persists: GDP, CPI, and PCE Update

This week’s economic data includes: (1) Q4 2025 GDP (second estimate), (2) Consumer Price Index (CPI) for February, (3) PCE (Personal Consumption Expenditure) price index, personal income, and personal spending for January, and (4) weekly initial jobless and continuing claims.

KEY SUMMARY:

Fourth‑quarter 2025 GDP growth was revised down to a weak 0.7% annualized pace due to broad‑based softness in consumer spending, government spending, exports, and investment, with private demand also easing—highlighting a notable slowdown in economic momentum.

Fourth‑quarter 2025 GDP growth was revised down sharply in the second estimate, with the economy expanding at a 0.7% annualized pace—the slowest in three quarters and well below the 1.4% reported in the advance estimate—driven by weaker consumer spending, government spending, exports, and investment. For the full year, GDP grew 2.1%, the slowest pace since 2020. The largest downward revision came from consumer spending, reflecting a notable slowdown in services consumption, while exports and government spending also subtracted more from growth, with government spending reducing GDP by nearly 1% after contributing positively in the prior quarter. Excluding government spending, inventories, and trade, final sales to private domestic purchasers were revised down to 1.9% from 2.4%, indicating that underlying private demand softened during the government shutdown.

 

February CPI increased 0.3% month over month and 2.4% year over year, driven mainly by higher food and energy prices, while core inflation remained contained at 0.2% monthly and 2.5% annually, reflecting uneven but still manageable underlying inflation pressures.

February CPI rose 0.3% month over month, up from January and in line with expectations, driven primarily by higher food and energy prices, while year‑over‑year inflation held steady at 2.4%. Food prices accelerated, led by sharp increases in fresh vegetables, beef, and coffee, though egg prices provided a notable offset with steep monthly and annual declines. Energy prices rebounded after January’s drop, reflecting higher gasoline and fuel oil prices, while services inflation remained firm, supported by shelter, medical services, and travel‑related categories.

 

Outside of food and energy, inflation pressures were mixed. Core goods prices edged higher, with increases in appliances and apparel suggesting some pass‑through of tariff‑related costs, while prices for education, communication, and used vehicles continued to decline. Core services inflation moderated slightly, with shelter rising at a steady pace and airline fares and lodging rebounding, offset by declines in motor vehicle insurance and recreation services. Overall, core CPI rose 0.2% month over month and 2.5% year over year, indicating inflation remains contained but uneven across categories.

 

The January PCE report showed inflation easing modestly but remaining elevated, with core inflation still firm, while income growth and tax benefits supported consumer spending and savings, resulting in resilient, service‑driven consumption despite signs of household caution.

The BEA’s January report showed inflation pressures easing modestly but remaining elevated, with the headline PCE price index rising 0.3% month over month, driven primarily by higher services prices. Goods inflation was mixed, with durable goods prices increasing while nondurable goods declined due to lower gasoline and fuel oil prices. Services inflation was broad‑based, though shelter inflation moderated, and on a year‑over‑year basis headline PCE eased to 2.8%, while core PCE rose to 3.1%, underscoring persistent underlying inflation pressures.

 

Personal income increased 0.4% in January, supported by higher wages, dividend income, and Social Security benefits, though the year‑over‑year pace slowed to its weakest since mid‑2025. Disposable personal income surged 0.9%, largely reflecting tax benefits, and real disposable income posted its strongest monthly gain since March 2025. At the same time, households boosted savings, with the personal saving rate rising to 4.5%, suggesting increased caution and a preference to save rather than spend incremental income.

 

Personal spending rose 0.4% in January, exceeding expectations and driven entirely by strength in services, particularly utilities, healthcare, and financial services, while goods spending declined. On a year‑over‑year basis, nominal consumer spending accelerated, and real consumer spending continued to improve, rising 2.4% annually. Overall, the data point to resilient but increasingly service‑driven consumption, supported by income growth and tax benefits, even as households show greater sensitivity to inflation and uncertainty.

 

Weekly initial jobless claims remained low and below expectations, signaling continued labor market stability, while slightly elevated continuing claims suggest unemployed workers are still facing some difficulty finding new jobs, pointing to gradual cooling at the margins.

Initial jobless claims edged down by 1,000 to 213,000 for the week ending March 7, coming in below expectations and remaining well under year‑ago levels, while the four‑week average also declined—pointing to continued overall stability in the labor market. At the same time, continuing claims fell to 1.85 million and stayed roughly in line with last year, though their elevated level and relatively flat four‑week average suggest that unemployed workers are still facing somewhat greater difficulty finding new jobs, indicating a labor market that remains stable but is gradually cooling at the margins.

 

Markets focused on rising forward‑looking inflation risks from the war with Iran—rather than backward‑looking data—driving higher yields, weaker equities, and delayed rate‑cut expectations, as slowing growth, a fragile labor market, elevated inflation, and persistent oil price pressures reinforced a higher‑for‑longer outlook despite cautious optimism that a recession can be avoided.

This week’s inflation data—including February CPI and January PCE—had little direct impact on markets, as both reports were backward‑looking and largely predated the war with Iran. Instead, investor focus shifted to forward‑looking inflation risks tied to rising energy and fertilizer prices. These cost pressures are expected to ripple through transportation, shipping, food, chemicals, and manufacturing. At the same time, consumer spending softened in January, with households pulling back on goods and discretionary purchases, while spending on essential services such as healthcare, housing, and utilities remained resilient.

 

Markets also reacted negatively to the second estimate of fourth‑quarter GDP, which showed growth was meaningfully slower than previously reported, even before geopolitical tensions escalated. While tax refunds tied to the One Big Beautiful Bill Act may provide a short‑term boost to spending, the underlying economic momentum appears fragile. Labor market conditions weakened in February, with job losses, a higher unemployment rate, and job growth concentrated primarily in healthcare and social assistance. Core PCE inflation rose to 3.1%, well above the Fed’s 2% target, leaving policymakers facing rising risks to both inflation and employment as signs of stagflationary pressure emerge.

 

As the U.S. enters the third week of the war with Iran, administration officials suggested the conflict could last another four to six weeks. While markets broadly align with this outlook, oil prices are likely to remain elevated even after hostilities ease, as restoring production and normalizing global supply chains will take time. Investors continue to believe political pressure will remain strong to contain energy costs and interest rates ahead of the midterm elections. Despite these risks, markets remain cautiously optimistic that a recession can be avoided, given the U.S. economy’s greater resilience and reduced dependence on oil compared with past energy‑driven downturns.

 

Financial markets reflected these pressures over the week. Equity markets fell for a third consecutive week, weighed down by higher oil prices, geopolitical uncertainty, slower growth, and persistent inflation. At the same time, Treasury yields moved sharply higher across the curve, as inflation concerns outweighed traditional safe‑haven demand. Rate‑cut expectations were pushed further out, with markets now pricing just one cut in late 2026 and delaying expected easing in 2027—reinforcing the broader shift toward a higher‑for‑longer interest rate environment.

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DETAILED ANALYSIS:

Q4 2025 GDP – Second Estimate:

GDP growth was revised lower in the second estimate of fourth‑quarter output. The economy expanded at a 0.7% annualized pace, the slowest in three quarters, down from the 1.4% reported in last month’s advance estimate. The downward revision was driven primarily by weaker consumer spending, government spending, exports, and investment. For the full year, GDP rose 2.1%, marking the slowest annual growth rate since 2020.

 

In terms of contributions to GDP growth, consumer spending was revised down by 0.25 percentage points, from 1.58% to 1.33%, representing the largest downward revision among components. This was largely driven by a slowdown in services consumption, which was revised down from 3.4% to 2.7%. Exports contributed negatively, with their drag on GDP deepening by 0.26 percentage points, from ‑0.10% to ‑0.36%, the second‑largest downward revision. Government spending also weighed further on growth, subtracting 1.03% from GDP compared with a ‑0.90% contribution in the advance estimate, reflecting additional declines in both federal and state and local government spending. As a result, government spending reduced GDP by nearly 1.0% in the fourth quarter after contributing 0.38% in the prior quarter.

 

Excluding government spending, inventories, and trade, final sales to private domestic purchasers—a key measure of underlying private demand—were revised down to 1.9% from 2.4%, indicating that private demand softened during the government shutdown.

 

CPI – February Update: 

The Bureau of Labor Statistics (BLS) released February consumer price data showing that CPI rose 0.3% month over month, up from a 0.2% increase in January. The February reading came in as expected and was driven primarily by higher energy and food prices, which continue to pose political and economic risks for the Trump administration as it works to address affordability concerns ahead of the midterm elections. Key contributors to the monthly increase included:

 

• Shelter: 30.7%
• Medicare services: 16.1%
• Apparel: 11.6%
• Gasoline: 9.0%
• Fresh fruits & vegetables: 6.4%

 

On a year-over-year basis, consumer prices rose 2.4%, unchanged from January and in line with market expectations.

 

Food Prices

Food prices rose 0.4% month-over-month, following a 0.2% increase in January. Grocery store prices rose 0.4%, driven primarily by:

 

• Fresh vegetables: +4.1% MoM (+5.4% YoY)
  • Lettuce: +12.2% MoM (+15.3% YoY)
  • Tomatoes: +6.4% MoM (+5.8% YoY)
• Beef: +1.5% MoM (+14.4% YoY)
• Coffee: +1.8% MoM (+18.4% YoY)

 

Prices for food away from home rose 0.3% month over month, up from 0.1% in January. On an annual basis, food prices increased 3.1%, with grocery store prices up 2.6% and food away from home up 3.9%. One notable positive development was egg prices, which declined 3.8% month over month and were down 42.1% year over year.

 

Energy Prices

Energy prices rose 0.6% month over month, reversing a 1.5% decline in January. The increase was driven primarily by a 0.8% rise in gasoline prices and an 11.1% increase in fuel oil. On a year‑over‑year basis, energy prices rose 0.4%, led by increases in fuel oil (+6.2%), electricity services (+6.3%), and gas services (+10.9%), partially offset by a 5.6% decline in gasoline prices.

 

Goods Prices (Excluding Food and Energy)

Core goods prices increased 0.1% month over month, up from flat growth in January. Notable price increases included appliances (+3.1%) and apparel (+1.3%), suggesting that businesses are passing along tariff‑related costs to consumers.

 

Prices for education and communication fell 3.0%, driven by declines in telephone hardware, calculators, and other consumer information items (‑5.7%). Used vehicle prices declined 0.4% month over month, marking a third consecutive monthly decline. Meanwhile, tariff‑sensitive new vehicle prices were unchanged in February, down from a 0.1% increase in January, and have remained relatively subdued since Liberation Day. On a year‑over‑year basis, new vehicle prices rose 0.5%.

 

Services Prices (Excluding Energy)

Core services prices rose 0.3% month over month in February, slightly below the 0.4% increase in January. Shelter costs—which account for roughly 31% of CPI—rose 0.2%, unchanged from the prior month. Hotel and motel prices surged 1.1%, reversing a 0.5% decline in January, while airline fares increased 1.4%, down from a 6.5% jump in January. Medical services prices rose 0.6%, and water, sewer, and trash collection services increased 0.7%. In contrast, prices for motor vehicle insurance and recreation services declined by 0.3% and 0.2%, respectively.

 

Core CPI

Excluding food and energy, core CPI rose 0.2% month over month, down from 0.3% in January and in line with market expectations. On a year‑over‑year basis, core CPI increased 2.5%, unchanged from January.

 

PCE Price Index & Personal Income and Outlays – January Update: 

The Bureau of Economic Analysis (BEA) released its January report on the PCE price index, personal income, and personal spending:

 

PCE Price Index

In January, the headline PCE price index rose 0.3% month over month, slowing from a 0.4% increase in December and matching market expectations. The monthly increase was driven primarily by higher services prices (+0.4%).

 

Within goods, durable goods prices rose 0.4% month over month, led by sharp increases in recording media (+4.8%), personal computers and peripheral equipment (+3.1%), and sporting equipment, guns, and ammunition (+2.3%). In contrast, nondurable goods prices declined 0.1%, driven mainly by lower gasoline (‑3.2%) and fuel oil prices (‑4.9%).

 

Services inflation was broad‑based, with notable increases in outpatient services (+1.1%), airfares (+1.6%), video streaming and rental services (+3.2%), and photo processing (+2.5%). Housing‑related shelter prices rose 0.2% month over month, easing from a 0.3% increase in December. Food prices increased by 0.2%, while energy prices declined 3.3%. Combined food and energy prices fell 0.4% month over month in January, unchanged from December.

 

On a year‑over‑year basis, headline PCE inflation eased to 2.8% in January from 2.9% in December, below market expectations of 2.9%. The increase reflected higher prices for both goods (+1.3%) and services (+3.5%). Over the same period, food prices rose 2.0%, while energy prices declined 7.0%. Combined food and energy prices increased 1.1% year over year, down from 2.1% in December.

 

Core PCE inflation, excluding food and energy and the Federal Reserve’s preferred inflation measure, rose 0.4% month over month in January, matching both the prior month’s pace and market expectations. On a year‑over‑year basis, core PCE increased to 3.1% from 3.0% in December, signaling continued underlying inflationary pressure.

 

Personal Income

Personal income increased 0.4% month over month in January, up from 0.3% in December but below market expectations of 0.5%. The $113.8 billion gain was driven primarily by higher wages and salaries (+0.5%; $71.2 billion), personal dividend income (+2.0%; $44.6 billion), and Social Security benefits (+3.1%; $49.2 billion). On a year‑over‑year basis, personal income rose 4.4%, down from 4.6% in December and marking the slowest pace since June 2025.

 

Disposable personal income – a key support for consumer spending – jumped 0.9% month over month, up from 0.3% in December, largely driven by a 3.2% tax benefit. On a year‑over‑year basis, disposable income rose 4.2%, up from 3.7% in December. Real disposable income, adjusted for inflation, increased 0.7% month over month, the strongest gain since March 2025. Year over year, real disposable income rose 1.8%, the highest level since September 2025.

 

Personal saving increased by $134.2 billion to $1.054 trillion in January, pushing the personal saving rate up to 4.5% from a revised 4.0% in December – the highest level since July 2025 – indicating that some households chose to save additional income rather than spend it.

 

Personal Spending 

Personal spending rose 0.4% month over month in January, matching December’s increase and exceeding market expectations of 0.3%. The gain was driven by a 0.7% increase in services spending, while goods spending declined by 0.4%. Strength in services was led by electricity and gas (+3.3%), outpatient services (+1.6%), and financial services (+1.4%), reflecting higher prices for electricity (+3.1%), natural gas (+4.0%), physician services (+1.1%), dental services (+1.3%), paramedical services (+2.3%), and securities commissions (+8.7%).

 

On a year‑over‑year basis, consumer spending rose 5.3% in January, up from 4.6% in December. On an inflation‑adjusted basis, real consumer spending increased 0.1% month over month and rose 2.4% year over year, accelerating from 1.6% in December.

 

Jobless Claims – Week Ending March 7:

The Labor Department reported that initial jobless claims declined by 1,000 to 213,000 for the week ending March 7, compared with a revised 214,000 in the prior week and below market expectations of 215,000. Claims also remained well below the 223,000-level recorded during the same week last year. The four‑week moving average fell by 4,000 to 212,000 from a revised 216,000 the prior week, signaling continued overall stability in the labor market.

 

Continuing claims—which measure the number of individuals receiving unemployment benefits—decreased by 21,000 to 1.850 million for the week ending February 28, down from a revised 1.871 million in the prior week and slightly above expectations of 1.849 million. Claims remained just below the 1.851 million level recorded during the same week last year. Meanwhile, the four‑week moving average of continuing claims edged down to 1.852 million from 1.853 million the prior week, suggesting that unemployed workers continue to face somewhat greater difficulty finding new jobs.

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MARKET ANALYSIS:

Commentary

This week’s inflation releases—including February CPI and January PCE—had little direct impact on markets, as they are backward‑looking measures that largely predate the war with Iran. However, forward‑looking inflation concerns had a significant impact on market sentiment, as investors focused on the expected rise in inflation stemming from higher energy and fertilizer prices. These cost pressures are likely to have broad spillover effects across industries such as shipping, transportation, food, chemicals, and manufacturing due to the ongoing conflict in the Middle East. Meanwhile, real consumer spending was weak in January, as households pulled back on goods and discretionary purchases following the holiday shopping season, while spending on essential services—such as healthcare, housing, and electricity and gas—remained resilient.

 

Markets reacted negatively to the second estimate of fourth‑quarter GDP, which showed economic growth was meaningfully slower than previously reported last month, before the outbreak of the war with Iran. Some of this weakness may be partially offset by tax refunds related to the One Big Beautiful Bill Act, though the boost from tax refunds is expected to be short‑lived. The labor market weakened in February, with job losses, a higher unemployment rate, and job creation concentrated primarily in healthcare and social assistance since early last year—signaling a fragile labor market. Inflation also remained elevated, with core PCE rising to 3.1%, well above the Fed’s 2% target. Next week, the Federal Reserve will again assess rising risks to both inflation and the labor market but is widely expected to leave interest rates unchanged amid emerging signs of stagflationary pressures.

 

As the U.S. enters the third week of the war with Iran, comments over the weekend from Kevin Hassett, head of the White House’s National Economic Council, suggested Pentagon estimates place the duration of the conflict at four to six weeks. Energy Secretary Chris Wright similarly indicated the war could last several more weeks, describing it as a period of short‑term pain. Market expectations broadly align with these assessments. Investors continue to believe President Trump has strong incentives to rein in energy costs and interest rates, as affordability concerns remain front and center heading into the midterm elections. However, even if the conflict ends in the near term, oil prices are likely to remain elevated for some time, as restoring production and normalizing global shipments will take time. Markets remain cautiously optimistic that a recession can be avoided, as the U.S. economy is more resilient and far less dependent on oil than during prior energy‑driven downturns in the previous decades.

 

Equity Market Weekly Recap

Equity markets declined this week, marking a third consecutive weekly loss, driven primarily by surging oil prices, the war in the Middle East, weaker-than-expected economic growth, and persistent inflationary pressures.

 

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: -1.26% (weekly) & -4.89% (YTD), closing at 22,105
• S&P 500: -1.60% (weekly) & -3.12% (YTD), ending at 6,632
• Dow Jones Industrial Average: -1.99% (weekly) & -3.13% (YTD), closing at 46,558
• Russell 2000: -1.79% (weekly) & -0.07% (YTD), ending at 2,480

 

For the week ending March 13, 2026, crude oil prices surged sharply, with both major benchmarks – Brent and West Texas Intermediate (WTI) – posting gains of roughly 10% for the week. WTI settled at $98.71 per barrel on Friday, its highest closing level since 2022.

 

Prices were driven by heightened volatility and supply concerns following the escalation of the conflict in the Middle East, particularly around the Strait of Hormuz. While International Energy Agency (IEA) members agreed to release 400 million barrels from emergency reserves—equivalent to just four days of global consumption—this action provided limited relief.

 

As a result, oil prices remained elevated, and markets continue to be highly sensitive to the duration of the conflict and producers’ ability to restore disrupted supply flows.

 

Treasury Market Update

Treasury yields rose across nearly all maturities during the week, with the largest increases occurring in the 1‑year tenor and longer. The 10‑year Treasury yield ended the week at 4.28%, up 13 basis points, while the 5‑year yield finished at 3.87%, up 15 basis points. The sharp rise in yields was driven primarily by inflation concerns stemming from higher oil prices, along with signs of sticky inflation reflected in the core PCE measure. These inflationary pressures outweighed the typical flight‑to‑quality demand for Treasurys as safe‑haven assets during periods of geopolitical stress. Since the start of the war with Iran, the 2‑year Treasury yield has risen 35 basis points, the 5‑year yield is up 36 basis points, and the 10‑year yield has increased 31 basis points. As a result, the yield curve shifted higher compared with the prior week.

 

Key Treasury Yield Movements:

• 2-year yield: 3.73% (+0.17%)
• 5-year yield: 3.87% (+0.15%)
• 10-year yield: 4.28% (+0.13%)

 

Rate Cut Expectations

Unlike the prior week—when markets priced in two 0.25% rate cuts in July 2026 and January 2027—expectations have shifted meaningfully. Markets now anticipate just one rate cut in 2026, pushed back from July to the December FOMC meeting. In addition, the previously expected 0.25% cut in January 2027 has been pushed out to December 2027 and increased to a cumulative 0.50%. This shift reflects a further recalibration toward a higher-for-longer rate environment. If the single cut currently expected for 2026 is implemented, the federal funds rate upper bound would decline to 3.50% from the current 3.75%.

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NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

• 3/18 (Wednesday):
  • PPI (February)
  • FOMC Rate Decision
• 3/19 (Thursday)
  • Weekly Initial and Continuing Jobless Claims

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For a visual representation of this week’s economic review, you can view or download the slide deck here: 03.13.2026 CBC Weekly Economic Update Presentation Slides

Mark Yoon, CFA CPA

EVP & CFO of Commercial Bank of California

 

Thomas McCullough

EVP of Commercial Bank of California

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All content available on this material is general in nature, not directed or tailored to any particular person, and is for informational purposes only. Any of its content is not offered as investment advice and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. The information contained herein reflects the opinions and projections of Commercial Bank of California (CBC) as of the date hereof, which are subject to change without notice at any time. CBC does not represent that any opinion or projection will be realized. The information contained herein has been obtained from sources considered reliable, but neither CBC nor any of its advisors, officers, directors, or affiliates represents that the information presented on this material is accurate, current, or complete, and such information is subject to change without notice.