Inflation was one of the biggest concerns for the US economy in 2024. And fears over low prices look set to continue into 2025.
“We expect a gradual slowdown from the current position, but to levels that are still uncomfortably high for the Fed,” Deutsche Bank chief economist Matthew Luzzetti said in an interview with Yahoo Finance.
Inflation has moderated so far this year but remains persistently above the Federal Reserve’s 2% annual target, pressured by stronger-than-expected readings of monthly “core” price increases that remove volatile food and energy costs.
In November, the core index for personal consumption expenditures (PCE) and the core consumer price index (CPI), both closely monitored by the central bank, rose by 2.8% and 3.3%, respectively, compared to the previous year.
“Inflation will primarily be driven by the service side of the economy,” Luzzetti said, highlighting key services such as health care, insurance and even airline tickets. “Shelter inflation is also still high, and while it will moderate over the next year, it is likely that it could 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, up from a previous projection of 2.2%, before cooling to 2.2% 2026 and 2.0% in 2027.
That’s largely in line with Wall Street’s current projections. Of the 58 economists polled by Bloomberg, most see core PCE contracting to 2.5% in 2025, but expect a smaller slowdown in 2026, with most economists forecasting a higher reading of 2.4% compared to the Fed.
“Risks are certainly tilted in the direction of higher inflation,” Nancy Vanden Houten, chief U.S. economist at Oxford Economics, told Yahoo Finance.
“A big risk comes from the possibility that certain policies on tariffs and immigration will be implemented under the Trump administration.”
Policies proposed by President-elect Donald Trump, such as high tariffs on imported goods, tax cuts for corporations and restrictions on immigration, are considered by economists to be potentially inflationary, SEEbiz reports.
Those policies could further complicate the Federal Reserve’s path forward for interest rates.
At a press conference after the Federal Reserve’s last interest rate decision of the year, Federal Reserve Chairman Jerome Powell said the central bank expected “significant policy changes” but warned that the extent of policy adjustments remained uncertain.
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