Inflation was one of the top concerns for the US economy in 2024. Concerns about price stability appear to persist in 2025.
“We expect a gradual slowdown from where we are, but to levels that are still uncomfortably high for the Fed,” Matthew Luzetti, chief economist at Deutsche Bank, said in an interview with Yahoo Finance.
So far this year, inflation has remained moderate But it stubbornly remains above the Fed target at 2% On an annual basis, higher-than-expected readings of monthly increases in “core” prices, which exclude volatile food and energy costs, are under pressure.
“Inflation will be driven primarily by the services side of the economy,” Luzetti said, referring to basic services such as health care, insurance and even airline ticket prices. “Shelter inflation also remains high, and although it will decline over the next year, it will likely remain fairly high.”
According to updated economic forecasts from the Fed’s Summary of Economic Prospects (SEP), the central bank expects core inflation to reach 2.5% next year, higher than its previous forecast of 2.2%, before cooling to 2.2% in 2026 and 2.0% in 2027.
This is largely in line with Wall Street’s current expectations. Among 58 economists surveyed by Bloomberg, a majority see the core PCE rate falling to 2.5% in 2025, but expect a smaller slowdown in 2026, with the bulk of economists expecting a higher reading of 2.4% than the Fed.
“The risks are Definitely leaning in the direction “A lot of the risk comes from the possibility of implementing certain policies under the Trump administration on tariffs and immigration,” Nancy Vanden Houten, chief U.S. economist at Oxford Economics, told Yahoo Finance.
those policies It can add complexity The Federal Reserve’s path forward regarding interest rates.
In a press conference following the Federal Reserve’s latest interest rate decision for this year, Fed Chairman Jerome Powell said the central bank Expects ‘big policy changes’ But he cautioned that the extent of the policy adjustments remains uncertain.
“We need to see what it is and what its implications are,” he told reporters at the time, adding that the Fed was “thinking about these questions” and would have a “clearer picture” once the policies are implemented.
For some, the picture seems clearer than not.
Joseph Stiglitz, a Nobel Prize-winning economist and professor at Columbia University, said: Yahoo Finance’s annual investment conference last month The US economy has achieved a soft landing, as prices stabilize and unemployment rates remain low. “But this will end on January 20,” he warned, referring to Inauguration Day.
The definitions were One of the most talked about Trump campaign promises. The president-elect pledged to impose comprehensive tariffs of at least 10% on all trading partners, including a 60% tariff on Chinese imports.
“It will be inflationary,” Stiglitz said. “Then you start thinking about the inflationary spiral, and prices will rise. Workers will want more wages. Then you start thinking about what would happen if others retaliated (with their own duties).”
FILE – Republican presidential candidate former President Donald Trump visits Sprankle Neighborhood Market in Kittanning, Pennsylvania, Sept. 23, 2024. (AP Photo/Alex Brandon, File) ·Associated Press
Stiglitz believes Powell will raise interest rates if inflationary pressures continue.
“If you combine high interest rates with retaliation against other countries, you get a global slowdown,” he said. “Then we have the worst of all possible worlds: inflation, recession, or slow growth.”
BNP Paribas issued a bleak forecast for 2025, predicting that the Fed will pause its monetary easing cycle next year amid a “significant rise in inflation from late 2025 to 2026” due to the implementation of tariffs. The company expects the CPI to stabilize at 2.9% by the end of next year before rising to 3.9% by the end of 2026.
Meanwhile, Minneapolis Fed President Neel Kashkari ranked possible retaliation by other countries As a “mutual” trade war.This would keep inflation high in the long term.
Investors are starting to notice the risks. In the latest Bank of America Global Fund Managers Survey released earlier this month, expectations were… “No landing” scenario The economy continues to grow but inflationary pressures persist, reaching their highest level in eight months.
In the United States, tariffs are usually set by Congress, but the president has the authority to impose certain tariffs Special circumstancesTrump has pledged to do so.
He – she It’s still not clear What policies will be a priority once Trump takes office or if he will fully commit to the promises he has already made?
“Our baseline is that we will have tariffs next year, but they start relatively low and targeted,” Luzetti said, anticipating a cumulative 20% increase in tariffs on China, as well as more targeted tariffs on Europe.
“Things like the global base tariff, which is the blanket tariff rate that Trump threatened, we don’t think will be implemented,” he said.
However, the economist believes that the tariffs Trump chooses to implement, whatever they are, will lead to higher inflation over time. He has agreed to a zero interest rate cut from the Fed next year for this reason.
He added: “Our view is that inflation will not go below 2.5% next year and that the Fed will not be comfortable with that and therefore will not continue to cut interest rates.” “But we also have expectations that the economy will remain quite resilient.”
“There is a fair amount of tailwind for an economy that is already receiving strong growth momentum, and the Fed just cut interest rates by 100 basis points this year,” Luzetti said. “We think all of this sets a very solid platform for growth over the next year.”
