Stocks edged lower after a disappointing batch of economic data signaled a troubling combination of persistent inflation and slowing growth. The SPDR S&P 500 ETF Trust $SPY ( ▼ 0.3% ) slid toward premarket lows as investors reassessed the outlook for the economy and interest rates.
At the center of the reaction was the Federal Reserve’s preferred inflation gauge, which came in hotter than expected just as growth showed signs of cooling.
Inflation refuses to cooperate
Core PCE inflation rose 0.4% month over month in December, exceeding expectations for a 0.3% increase. Because this measure strips out volatile food and energy prices, it’s considered a clearer signal of underlying price pressures.
A stronger-than-expected reading suggests inflation progress may be stalling, complicating the Fed’s path toward rate cuts. Persistent inflation typically means borrowing costs could stay higher for longer, a negative for stocks and other risk assets.
Growth loses momentum
At the same time, economic growth slowed more than anticipated. Fourth-quarter GDP expanded at an annualized rate of just 1.4%, roughly half the pace analysts had forecast.
This combination of sticky inflation and weak growth is often viewed as the worst-case macro scenario for markets. It raises the risk of a “higher-for-longer” rate environment without the cushion of strong economic expansion.
Fed outlook unchanged, for now
Despite the disappointing data, expectations for Federal Reserve action in the coming months barely moved immediately after the release. Markets appear to be waiting for additional evidence before repricing the timing of potential policy shifts.
For investors, the takeaway is clear: the battle between inflation and growth is far from over, and each new data point has the potential to swing sentiment as markets search for clarity on the next phase of monetary policy.