US economy was already vulnerable even before the war with Iran

U.S. economic growth was weaker at the end of 2025 than data initially indicated, and inflationary pressures persisted early this year — a worrying portrait of an economy on shaky ground before the war with Iran turned oil and financial markets upside down.

Consumer prices rose moderately in January, the Federal Reserve’s preferred inflation gauge showed Friday. Economists fear prices will rise further in the coming weeks. And gross domestic product, the main measure of economic growth, adjusted for inflation, was revised downward to an annual pace of 0.7% in the final three months of the year.

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The personal consumption expenditures price index, the Fed’s preferred inflation gauge, registered a monthly increase of 0.3% in the first month of 2026. Compared with the same period last year, prices were 2.8% higher. The “core” inflation reading, which excludes the most volatile food and energy prices, came in at 0.4% for the month and 3.1% year-on-year. That’s one percentage point above the Fed’s 2% target.

“Basically, this shows that inflation gained momentum at the beginning of the year,” Omair Sharif, founder of research firm Inflation Insights, said of the data. “All the key data is moving in the wrong direction.”

Recorded just before the oil price shock caused by the war with Iran, the price indicators offer a worrying picture for inflation going forward.

After reaching a peak above 9% in annual terms in 2022, inflation cooled down in 2024, remaining just above the Fed’s 2% target. Since 2025, however, the inflationary picture has worsened.

Goods inflation, which had been slowing for years, has picked up again in several categories since President Donald Trump announced tariffs last fall. Some of these tariffs were struck down by the Supreme Court.

Others, however, remain in force and have led companies to alternate between absorbing the increase in the cost of imports and passing these new costs on to consumers.

“Things are not falling apart,” said Claudia Sahm, chief economist at New Century Advisors and a former Fed projections analyst. “But I think household consumption has been a source of resilience, and things are not as strong as they have been in recent years.”

According to analysts at Employ America, a research group that tracks employment and price data, tariffs are a “clear culprit” for some of the excess inflation, especially in apparel and furniture.

But they note that shortages stemming from the artificial intelligence boom are also contributing to rising prices. Computer accessories and technology equipment, for example, have been recording abnormal cost increases compared to the averages of recent years.

Inflation in healthcare services, an important part of the economy, also continues to contribute to higher prices. This personal consumption expenditure index released on Friday has data slightly above the more commonly cited consumer price index.

This divergence is largely a result of the fact that the CPI places a greater weight on housing inflation, and the pace of rent increases has slowed along with the economy as a whole.

In any case, both inflation measures are likely to rise next month as the inflationary effects of higher oil prices are felt. Airline tickets, gasoline prices and restaurant costs are expected to be affected.

Despite all the worrying news weighing on consumer sentiment and financial markets, consumption levels in January indicate that the economy is growing.