Mixed Signals as Inflation Holds Firm and Growth Slows

Matthew Rubin Chief Investment Officer

 

1. Delayed data showed inflation firmed at year-end, with price pressures remaining elevated and easing only gradually.
2. Jobless claims declined more than expected last week, signaling improved labor-market stability despite mixed underlying trends.
3. Fourth-quarter growth slowed to 1.4%, largely due to the government shutdown, while underlying economic activity remained resilient.¹

 

1. Inflation Data Shows Firm Price Pressures to End the Year

Last week’s update on personal consumption expenditures (PCE) inflation was delayed due to the 2025 government shutdown, but it still offered a clear view of year-end pricing trends. Core PCE inflation, the Federal Reserve’s preferred gauge that excludes volatile food and energy, rose 0.4% in December, exceeding expectations and accelerating from the prior month.¹ On a year-over-year basis, core inflation increased to 3.0%, moving further above the Federal Reserve’s long-term 2% target.¹

Broader price measures showed a similar trend, with overall PCE inflation also rising 0.4% for the month.¹ Consumer spending increased at the same pace, though gains were more modest after adjusting for inflation. This suggests real consumption growth slowed as 2025 came to a close.

Inflation persisted in some underlying components, particularly services. Based on early estimates, price pressures could remain firm into January. While conditions continue to evolve, last week’s report reinforced the view that inflation remains elevated and may take time to move lower.

2. Labor Market Shows Renewed Stability as Claims Decline

Initial jobless claims fell sharply last week, reaching their lowest level of the year so far, a potential sign that the labor market is stabilizing after signs of softness in prior months. New filings for unemployment benefits declined by 23,000 to 206,000 for the week ending February 14, well below expectations and a notable improvement from late-January levels.² On an unadjusted basis, claims also dropped meaningfully compared with both the prior week and the same period last year.²

Continuing claims, which track the number of people already receiving benefits, edged higher to 1.87 million in the prior week.² While this increase suggests some ongoing challenges in reemployment, the broader trend in initial claims indicates fewer new layoffs.

Some analysts noted that severe winter weather in late January may have temporarily skewed earlier data and steepened the recent decline. Overall, the latest figures align with stronger employment data seen earlier in the month, though other indicators remain mixed. Expectations for the year continue to call for steady economic activity and a gradual easing in labor market pressures.

3. Economic Growth Slowed in the Fourth Quarter Amid Shutdown Impact

Economic data released last week showed that U.S. growth slowed more than expected at the end of 2025, largely reflecting the impact of the 43-day government shutdown. Real gross domestic product increased at a 1.4% annualized pace in the fourth quarter, below forecasts and down from the prior quarter’s stronger growth.¹ A sharp decline in federal spending played a central role, subtracting roughly one percentage point from overall growth.

Despite this drag, underlying economic activity remained relatively steady. Consumer spending continued to support growth, rising at a moderate pace and contributing meaningfully to overall output.³ Business investment also showed mixed results, with strength in technology and artificial intelligence-related spending offset by weaker investment elsewhere.³ Trade activity added further pressure, with exports declining during the quarter. However, broader measures of private domestic demand suggested that core economic momentum remained intact.

With the government fully reopened, conditions may be favorable for a rebound in early 2026. Last week’s report indicated that, while headline growth slowed, the economy’s foundation remained stable.

For the period ending 2/20/26.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ Bureau of Economic Analysis
² U.S. Department of Labor
³ Bureau of Labor Statistics

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