Inflation has been a persistent concern for the US economy in 2024 and shows no signs of abating in 2025. Expectations for a gradual slowdown in inflation levels above the Federal Reserve’s target of 2% remain uncomfortably high, according to Deutsche Bank’s chief economist, Matthew Luzzetti. While there has been some moderation in inflation this year, it continues to exceed the Fed’s threshold due to monthly price increases in core components excluding food and energy. Key indices such as the core PCE and CPI have risen significantly over the past year, particularly in core services like healthcare, insurance, and airfares.
Here are some key points to consider about the current state of inflation and its future trajectory:
- Updated forecasts from the Fed’s Summary of Economic Projections predict core inflation to hit 2.5% in 2025, higher than initial projections. Despite a slight cooling down to 2.2% in 2026 and 2.0% in 2027, the risks of higher inflation persist.
- Economists interviewed by Bloomberg expect core PCE to moderate to 2.5% in 2025 with less of a decline in 2026, potentially reaching 2.4%.
- A potential factor contributing to higher inflation is President-elect Donald Trump’s proposed policies, including high tariffs on imports and corporate tax cuts, which could spur inflation and complicate the Fed’s interest rate decisions.
Moreover, Nobel Prize-winning economist Joseph Stiglitz warns about the potential impact of Trump’s proposed tariffs on inflation and global economic growth. If inflation pressures persist, Stiglitz believes the Fed may raise interest rates, leading to a slowdown. BNP Paribas projects a substantial rise in inflation in late 2025 through 2026 due to tariff implementations, with CPI potentially reaching 3.9% by the end of 2026.
Investors are increasingly concerned about a scenario where inflation persists despite economic growth, with expectations of such a scenario reaching an eight-month high. While the specifics of Trump’s tariffs remain unclear, economists believe that even targeted tariff increases could contribute to higher inflation over time.
Despite these challenges, the US economy has shown resilience in 2024, with solid retail sales, strong GDP, and a stable unemployment rate. Luzzetti remains optimistic about the economy’s growth prospects with the Fed’s rate cuts providing a strong foundation for continued expansion.
In conclusion, the outlook for inflation in 2025 remains uncertain due to various factors such as tariffs, tax cuts, and immigration policies. While risks of higher inflation persist, the US economy’s resilience and the Fed’s strategies provide some stability amidst the prevailing uncertainties. Stay informed about the latest developments and trends in the financial landscape to navigate the evolving economic landscape effectively.
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