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Inflation has been one of the main concerns for the US economy in 2024. And it appears that fears related to price stickiness will continue into 2025.
“We expect a gradual deceleration from where we are, but at levels that remain too high for the Fed,” Matthew Luzzetti, chief economist at Deutsche Bank, told Yahoo Finance in an interview.
Since the start of the year, inflation has moderated but remains stubbornly above THE Federal Reserve’s 2% target on an annual basis, under pressure from higher-than-expected figures on monthly “core” price increases, which exclude volatile food and energy costs.
“Inflation will be driven primarily by the services sector of the economy,” Luzzetti said, citing basic services like health care, insurance and even airfares. “Housing inflation is also still high, and although it will decline over the next year, it is likely to remain somewhat elevated.”
According to updated economic forecasts from the Fed’s Summary of Economic Projections (SEP), the central bank expects core inflation to reach 2.5% next year, higher than its previous forecast of 2.2%. before calming down to 2.2% in 2026 and 2.0% in 2027.
This is largely in line with current Wall Street projections. Of the 58 economists surveyed by Bloomberg, the majority forecast a moderation in core PCE to 2.5% in 2025, but they expect a lesser deceleration in 2026, with the majority of economists anticipating a higher figure of 2.4 % compared to the Fed.
“The risks are certainly inclined in the direction “Higher inflation,” Nancy Vanden Houten, chief U.S. economist at Oxford Economics, told Yahoo Finance. “A lot of the risk comes from the possibility of certain policies being implemented under the Trump administration on tariffs and immigration.”
At a news conference following the Federal Reserve’s final interest rate decision of the year, Federal Reserve Chairman Jerome Powell said the central bank expects “significant political changes” but he cautioned that the extent of policy adjustments remains uncertain.
“We need to see what they are and what effects they have,” he told reporters at the time, adding that the Fed was “thinking about these questions” and would have “a much clearer picture” once policies would be implemented.
For some, the picture is already clearer than not.
Joseph Stiglitz, a Nobel Prize-winning economist and professor at Columbia University, told Yahoo Finance’s annual Invest conference last month that the U.S. economy has experienced a soft landing, in which prices stabilize and unemployment remains low. “But it ends on January 20,” he warned, referring to Inauguration Day.
The prices were one of the most talked about Trump campaign promises. The president-elect has pledged to impose across-the-board tariffs of at least 10% on all trading partners, including 60% tariffs on Chinese imports.
“It will be inflationary,” Stiglitz said. “And then you start to think about the inflationary spiral, prices go up. Workers will want more wages. And then you start to think about what would happen if others fought back.” [with their own duties]”.
FILE – Former President Donald Trump, Republican presidential candidate, visits the Sprankle Neighborhood Market in Kittanning, Pennsylvania, September 23, 2024. (AP Photo/Alex Brandon, File) ·ASSOCIATED PRESS
Stiglitz believes Powell will raise interest rates if inflationary pressures persist.
“If you combine rising interest rates and retaliation from other countries, you’re going to get a global slowdown,” he said. “We then have the worst of all possible worlds: inflation and stagnation, or slow growth.”
BNP Paribas issued a gloomy outlook for 2025, expecting the Fed to suspend its easing cycle next year amid a “substantial rise in inflation from the end of 2025 to 2026” due to the in place of customs tariffs. The company forecasts that the CPI will stabilize at 2.9% by the end of next year before climbing to 3.9% by the end of 2026.
Meanwhile, Minneapolis Fed President Neel Kashkari categorized possible retaliation from other countries. like a “tit for tat” trade warwhich would keep inflation high in the long term.
Investors are starting to realize the risk. In the latest survey of global fund managers from Bank of America released earlier this month, expectations of a “no landing” scenario, in which the economy continues to grow but inflationary pressures persist, reached its highest level in eight months.
In the United States, Congress generally sets tariffs, but the president has the power to impose some. special circumstancesand Trump has pledged to do so.
He remains unclear what policies will be prioritized once Trump takes office or whether he will fully commit to keeping the promises he has already made.
“Our scenario is that we will get tariffs next year, but they will start relatively low and targeted,” Luzzetti said, predicting a cumulative 20% increase in tariffs on China, in addition to more targeted levies on Europe.
“Things like the universal base tariff, which is this across-the-board tariff rate that Trump has threatened, we don’t think that will be implemented,” he said.
Still, the economist believes that whatever tariffs Trump chooses to implement will cause inflation to rise over time. That’s why he predicts zero interest rate cuts from the Federal Reserve next year.
“Our view is that inflation will not fall below 2.5% next year and that the Fed would not be comfortable with that and therefore would not continue to cut rates,” he said. he declared. “But we also hope that the economy will remain quite resilient.”
“There are just a number of tailwinds in an economy that is already enjoying strong growth momentum, and the Fed just undertook 100 basis point rate cuts this year,” Luzzetti said. “All of this, in our view, provides a pretty solid foundation for growth for next year.”
