Inflation is one of the biggest concerns for the U.S. economy in 2024. And concerns about remaining high prices appear to continue into 2025.
“From where we are now, we expect it to slow gradually, but to levels that are still uncomfortably high for the Fed,” Matthew Ruzzetti, chief economist at Deutsche Bank, told Yahoo Finance in an interview.
Inflation has slowed so far this year, but the Fed’s It remains stubbornly above its annual rate target of 2%.
The Core Personal Consumption Expenditures (PCE) Index and Core Consumer Price Index (CPI), both closely tracked by the central bank, rose 2.8% and 3.3% year-on-year, respectively, in November.
“Inflation will be primarily driven by the services side of the economy,” Ruzzetti said, citing core services such as health care, insurance and even airfare. “Shelter inflation also remains high and is likely to remain somewhat elevated, although it will decline over the next year.”
The latest economic projections from the Fed’s Summary of Economic Projections (SEP) show that core inflation will reach 2.5% next year, above the previously expected 2.2%, 2.2% in 2026 and 2.0% in 2027. We expect it to decline.
This is roughly in line with Wall Street’s current expectations. Of the 58 economists surveyed by Bloomberg, a majority expect core PCE to slow to 2.5% in 2025, but less of a slowdown in 2026, with most economists expecting core PCE to slow to 2.5% compared to the Fed. The company expects a higher figure of 2.4%.
“The risks certainly lean toward higher inflation,” Nancy Vanden Houten, chief U.S. economist at Oxford Economics, told Yahoo Finance. “Many of the risks arise from the possibility that certain tariff and immigration policies will be implemented under the Trump administration.”
President-elect Donald Trump’s proposed policies, including high tariffs on imported goods, tax cuts for businesses and immigration restrictions, are considered by economists to be potentially inflationary.
Such policies could further complicate the Fed’s future direction of interest rates.
In a press conference after the year’s final interest rate decision, Fed Chairman Jerome Powell said the Fed expects “significant policy changes” but warned that the extent of policy adjustments remains unclear.
“We need to figure out what those are and what their impact will be,” he told reporters at the time, adding that the Fed was “looking at these issues” and that policies are not being implemented. He added that this would give a “clearer picture”.
For some, the situation is already clear.
Nobel Prize-winning economist and Columbia University professor Joseph Stiglitz said last month at Yahoo Finance’s annual investment conference that the U.S. economy has achieved a soft landing with prices stable and unemployment remaining low. “But it ends on January 20th,” he warned, referring to Inauguration Day.
Tariffs are one of the most talked about promises of the Trump campaign. The president-elect has pledged to impose blanket tariffs of at least 10% on all trading partners, including a 60% tariff on imports from China.
“It’s going to be inflation,” Stiglitz said. “Then you start thinking about an inflationary spiral, and prices go up. Workers will ask for more wages. And you start thinking about what happens if others retaliate.” [with their own duties]. ”
FILE – Republican presidential candidate former President Donald Trump visits Sprunkles Neighborhood Market in Kittanning, Pennsylvania on September 23, 2024. (AP Photo/Alex Brandon, File) ·Related news organizations
Stiglitz believes Powell will raise rates if inflation pressures persist.
“The combination of higher interest rates and retaliation from other countries will result in a global economic slowdown,” he said. “That would lead to the worst possible world: inflation and stagnation, or slowing growth.”
BNP Paribas issued a grim outlook for 2025, predicting the Fed would pause its easing cycle next year as the introduction of tariffs causes “inflation to rise significantly in late 2025 and into 2026.” The company expects CPI to settle at 2.9% by the end of next year and rise to 3.9% by the end of 2026.
Meanwhile, Minneapolis Fed President Neel Kashkari labeled potential retaliation by other countries a “retaliatory” trade war and said inflation would remain high for an extended period of time.
Investors are starting to realize the risks. Bank of America’s latest global fund manager survey released earlier this month found expectations for a “no-landing” scenario, in which economic growth continues but inflationary pressures persist, to an eight-month high.
In the United States, Congress typically sets tariffs, but the President has the authority to impose specific tariffs based on: special circumstancesand Trump has vowed to do so.
that remains unclear What policies will Trump prioritize once he takes office, or will he fully implement the promises he has already made?
“Our baseline is that there will be tariffs next year, but we will start relatively low and targeted,” Ruzzetti said.In addition to more targeted taxes on Europe, tariffs on China would be They predicted a cumulative increase of 20%.
“Things like universal tariffs, the across-the-board tariffs that President Trump has threatened, we don’t believe will be implemented,” he said.
Still, the economist believes that whatever tariffs Trump chooses to impose will lead to higher inflation over time. To that end, he strongly hopes for the Federal Reserve to cut interest rates to zero next year.
“Inflation is not going to go below 2.5% next year, and our view is that the Fed is not happy about that and will not continue to cut rates,” he said. “But at the same time, we are hopeful that the economy will remain very resilient.”
And the U.S. economy demonstrated resilience throughout 2024. Retail sales again exceeded expectations in November, and GDP came in above expectations. Continued to perform well and outperform the trend. Unemployment continues to hover around 4%, and inflation is moderating, despite uncertainty about the future and the steep path to 2%.
“This is a significant tailwind for an economy that is already experiencing solid growth momentum, and the Fed just cut interest rates by 100 basis points this year,” Ruzzetti said. “We think all of this establishes a pretty solid foundation for growth over the coming year.”
alexandra canal I’m a senior reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, Email alexandra.canal@yahoofinance.com.
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