Inflation has remained a top concern for the US economy in 2024, and experts are already looking ahead to 2025 with a sense of cautious anticipation. The possibility of a resurgence in inflation is worrying investors and economists alike, as they assess the potential impact of both domestic policies and global economic factors. In this article, we’ll break down the factors behind the inflation concerns for 2025, what experts are predicting, and how these concerns could shape the economic landscape in the coming years.
The Persisting Inflation Concerns for 2025
Inflation in 2024 has moderated compared to previous years, but it remains a significant issue for the US economy. The Federal Reserve’s target for inflation is around 2%, but recent economic data indicates that inflation is not yet under control. Despite some signs of deceleration, inflation rates have been persistently higher than expected.
- Core inflation: Core inflation, which strips out volatile food and energy prices, continues to rise at a rate higher than anticipated. For instance, the Core Personal Consumption Expenditures (PCE) index for November saw a 2.8% increase, while the Core Consumer Price Index (CPI) rose by 3.3%.
- Pressure from services: According to Deutsche Bank’s chief economist, Matthew Luzzetti, inflation is primarily driven by the services sector, particularly healthcare, insurance, and airfares. Shelter inflation also remains stubbornly high, though it is expected to ease gradually in 2025.
Federal Reserve’s Outlook on Inflation in 2025
The Federal Reserve has been closely monitoring inflation and adjusting interest rates in an effort to bring it back down to the target range. According to the latest Summary of Economic Projections (SEP), the Fed predicts that core inflation will reach 2.5% in 2025, higher than the previous forecast of 2.2%. However, the expectation is that inflation will cool further in the long run, dropping to 2% by 2027.
However, the risks surrounding inflation remain high, with some economists projecting a more persistent inflation rate. Nancy Vanden Houten, lead US economist at Oxford Economics, points out that policies from the Trump administration, such as tariffs and immigration restrictions, could further fuel inflationary pressures.
How Trump’s Economic Policies Could Impact Inflation
The potential economic policies under President-elect Donald Trump are a major concern for Wall Street. Trump has indicated that his administration may adopt several inflationary measures that could drive up costs:
- Tariffs: Trump has proposed tariffs on goods from key trading partners, including China and Europe. If implemented, these tariffs could create price increases on a wide range of imported products, further driving inflation.
- Tax cuts and immigration policies: In addition to tariffs, Trump’s tax cuts for corporations and restrictions on immigration could also contribute to inflationary pressures. These policies might strain the labour market and increase the costs of goods and services across various sectors.
Joseph Stiglitz, a Nobel Prize-winning economist, has warned that these tariff policies could result in an “inflationary spiral,” where prices rise, wages increase, and other countries retaliate with their own tariffs. This would put further strain on the global economy, potentially causing stagflation (a combination of high inflation and stagnating growth).
Global Reactions and Inflationary Risks
The potential for retaliatory trade wars, especially with China and Europe, is another critical factor in the inflation outlook. Neel Kashkari, President of the Minneapolis Fed, highlighted the possibility of a “tit-for-tat” trade war that could keep inflation elevated. If other countries retaliate against US tariffs, it could escalate inflation pressures, particularly on imported goods.
Economists are starting to take notice of these risks, with the Bank of America Global Fund Manager Survey indicating growing concerns about inflation continuing even in a growing economy. The “no landing” scenario, where inflation pressures persist alongside economic growth, is becoming a major theme among Wall Street analysts.
The Federal Reserve’s Response to Inflation in 2025
As inflation remains higher than the Federal Reserve’s target, the central bank’s next steps are crucial. The Fed’s monetary policy will play a key role in determining whether inflation continues to rise or if the economy can stabilise. Jerome Powell, the Fed Chairman, has warned that “significant policy changes” are expected but that the Fed will need more clarity before adjusting its strategy.
- Interest rates: The Fed has already implemented several rate hikes in an effort to cool inflation. But, if inflation persists above the target, Powell may opt to continue raising interest rates to curb the inflationary pressures.
- Zero rate cuts: Wall Street is forecasting that the Fed will not cut interest rates in 2025 due to the inflationary risks posed by tariffs and other economic policies.
Outlook for the US Economy in 2025
Despite inflation concerns, the US economy remains resilient, with strong GDP growth and low unemployment rates. Retail sales continue to exceed expectations, and the economy has shown strong momentum in 2024, which is expected to continue into 2025.
However, the inflationary pressures could become more pronounced as tariffs take effect, potentially leading to a slowdown in global economic growth. Deutsche Bank forecasts that inflation will rise in the latter half of 2025 due to the rollout of tariffs, reaching 2.9% by the end of 2025. This could result in higher interest rates, which may lead to a reduction in consumer spending and business investments.
Headwinds and Tailwinds: What to Expect in 2025
As we look ahead to 2025, there are both headwinds and tailwinds to consider. On the positive side, the US economy remains relatively strong, with solid growth and low unemployment. However, the risks from inflationary policies, such as tariffs, tax cuts, and trade wars, could present significant challenges.
- Headwinds: The potential for higher tariffs and retaliatory trade wars, along with the risk of persistent inflation, could weigh on the US economy.
- Tailwinds: Despite inflation concerns, the US economy’s resilience, driven by consumer spending and strong GDP growth, could provide support as the year unfolds.
Conclusion: Inflation and the Road Ahead in 2025
As we approach 2025, inflation remains a key issue for Wall Street and economists alike. The combination of global factors, domestic policies, and the actions of the Federal Reserve will determine whether inflation remains persistent or begins to cool. While the economy shows strong growth momentum, the risk of inflation resurgence due to tariffs and other factors cannot be ignored.
As inflation pressures continue to affect the global economy, we’ll need to keep a close eye on how US economic policies, particularly those under the Trump administration, unfold in the coming months.
Relevant Links for Further Reading:
- Federal Reserve’s Economic Projections
- Inflationary Pressures and Tariffs
- Nobel Prize-winning Economist Joseph Stiglitz’s View
- Bank of America Global Fund Manager Survey
- Oxford Economics’ Inflation Forecast
Photo credit: The National Desk
