US economy slows sharply in Q4 as rising inflation pressures Fed

WASHINGTON — The U.S. economy slowed sharply in the final quarter of 2025 as a prolonged federal government shutdown and weakening consumer demand weighed on growth.

Gross domestic product grew at an annual rate of 1.4%, according to the Bureau of Economic Analysis. The figure marks a steep decline from the 4.4% growth rate recorded in the previous quarter.

The federal shutdown reduced overall GDP growth by 1.2 percentage points, officials said. Decreases in consumer spending and exports further contributed to the slowdown.

New data also signaled rising inflationary pressures. The Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, rose 0.4% in December, surpassing economist forecasts.

Wall Street reacted cautiously to the reports, with the Dow Jones Industrial Average trading slightly lower at the opening bell.

In the United Kingdom, the Office for National Statistics reported a record budget surplus of 30.4 billion pounds in January. The figure represents the highest surplus recorded since 1993.

U.S. economic data for the fourth quarter of 2025 presents a nuanced picture of a recovery interrupted by political friction. While the headline GDP growth of 1.4% fell short of market expectations, the underlying causes appear more transitory than structural. Analysts largely attribute the deceleration to the recent government shutdown—a political shock that suppressed public spending. As federal outlays are expected to normalize in the first quarter of 2026, a growth rebound remains the consensus forecast.

The more significant challenge for the dual mandate lies in the Personal Consumption Expenditures (PCE) price index. The acceleration of inflation alongside slowing growth has placed the Federal Reserve in an increasingly difficult policy bind. While a weakening growth profile would typically justify a pivot toward monetary easing, persistent price pressures mandate a restrictive stance, complicating the central bank’s path toward a soft landing.

The policy landscape under the Trump administration remains a pivotal variable. Beyond the immediate fiscal drag of the shutdown, economists are scrutinizing whether the administration’s trade agenda and tariff implementation are beginning to exert a broader cooling effect on the economy.

Despite these headwinds, the economy’s structural core—driven by sustained capital investment in Artificial Intelligence and resilient services spending—shows remarkable fortitude. However, the convergence of political volatility, an unpredictable trade regime, and stubborn inflation will serve as the primary headwinds for the U.S. economic outlook as it enters 2026.

Rising inflation is putting a direct strain on Vietnamese-American small businesses, from the neighborhood nail salon to the local phở restaurant, as the costs of supplies and labor continue to climb. While consumer spending on services has remained resilient so far, broader economic instability and a tightening of household budgets could lead to a decline in foot traffic across community hubs like Little Saigon in the near future.