Cook highlights stalled inflation and AI's labor market impact

Governor Cook stated that the US economy continues to be resilient, with stronger-than-forecast growth in the second half of 2025. However, inflation appears to have stalled stubbornly above the Federal Reserve's 2 percent target.

The personal consumption expenditures (PCE) price index is estimated to have risen 2.9 percent for the 12 months ending in December, with core inflation (excluding food and energy) at 3 percent.

This indicates that progress on inflation essentially stalled in 2025, a frustrating development after significant disinflation in previous years.

The disinflationary trend continued for housing services and eased for nonhousing services, but core goods prices saw a notable uptick, primarily reflecting increased tariffs last year on imported products.

Short-run inflation expectations have fallen since last spring, and longer-run expectations remain stable, but Cook emphasized the risk of higher inflation becoming entrenched if it remains above target for too long.

The labor market stabilized in late 2025 after softening earlier in the year, with the unemployment rate at 4.4 percent in December, little changed over the second half of the year and remaining relatively low compared to the 50-year average of 6.2 percent.

Layoffs remain low, and new applications for unemployment benefits have held steady.

However, risks persist, including a jump in individuals working part-time for economic reasons and slowed job creation, with nonfarm payrolls rising by only 50,000 in November and December.

Cook noted that this slowdown is likely connected to a fall in labor supply due to immigration policies and demographics, suggesting the low unemployment rate is not driven by strong labor demand.

The overall economy is solid, with GDP rising at a 4.4 percent annual rate in Q3 2025, driven by consumer spending.

However, this masks a challenging situation for low- and moderate-income households, who show increased delinquencies and stagnated spending, creating a "two-speed" or "K-shaped" economy.

Cook identified four reasons for low consumer sentiment: households feeling worse off relative to recent history, AI-related job uncertainty, decades-long structural changes (housing, education costs), and the impact of high inflation over the past five years.