Wall Street Worries About Inflation Resurgence in 2025
Concerns grow as inflation pressures may persist into 2025, impacting the economy and Federal Reserve policies
Inflation, Wall Street, Federal Reserve, Economy, USA
New York: Inflation has been a hot topic for the US economy this year, and it seems like worries about rising prices will stick around into 2025.
Matthew Luzzetti, the chief economist at Deutsche Bank, shared his thoughts, saying we might see a slow decline in inflation, but it’ll still be too high for the Fed’s comfort.
Even though inflation has eased a bit this year, it’s still above the Federal Reserve’s 2% target. Monthly reports show that core prices, which exclude food and energy, are still climbing.
In November, key indexes like the core Personal Consumption Expenditures (PCE) and the core Consumer Price Index (CPI) showed increases of 2.8% and 3.3% compared to last year.
Luzzetti pointed out that inflation is mainly driven by services, including healthcare and airfares. He also mentioned that housing costs are still high, although they might drop a bit next year.
The Fed’s latest economic forecasts suggest core inflation could hit 2.5% next year, which is higher than their earlier estimate. They expect it to cool down to 2.2% in 2026 and 2.0% in 2027.
Most economists surveyed by Bloomberg agree with this outlook, predicting core PCE will moderate to 2.5% in 2025, but they expect a slower decline in 2026.
There are concerns about inflation risks, especially with potential policies from the incoming Trump administration, which could include tariffs and immigration changes.
Trump’s proposed tariffs on imports and tax cuts for corporations are seen as inflationary by many economists, which could complicate the Fed’s decisions on interest rates.
After the Fed’s last interest rate meeting, Chair Jerome Powell mentioned that they expect significant policy changes, but the details are still unclear.
Joseph Stiglitz, a Nobel Prize-winning economist, warned that the current economic stability might end with the new administration taking office.
Trump has promised to impose tariffs, including a blanket 10% on all trading partners and a hefty 60% on Chinese imports, which Stiglitz believes will lead to inflation.
Stiglitz also thinks that if inflation continues, Powell will likely raise interest rates, which could lead to a global slowdown.
BNP Paribas has a gloomy outlook for 2025, predicting a rise in inflation due to tariffs, with CPI expected to reach 2.9% by the end of next year.
Minneapolis Fed president Neel Kashkari described potential retaliatory tariffs from other countries as a “tit-for-tat” trade war, which could keep inflation high.
Investors are starting to pay attention to these risks, with a recent survey showing a rise in expectations for a scenario where the economy grows but inflation remains a concern.
While Congress usually sets tariffs, the president can impose certain ones, and Trump has indicated he will do so.
It’s still uncertain which policies will take priority once Trump is in office or if he’ll stick to his campaign promises.
Luzzetti believes we’ll see some tariffs next year, but they might start low and targeted, projecting a 20% rise in tariffs on China.
He doesn’t think Trump’s broad tariff threats will be fully realized but expects whatever tariffs are implemented will lead to higher inflation over time.
He’s not anticipating any interest rate cuts from the Fed next year, as inflation is likely to stay above 2.5%.
Despite the uncertainty, the US economy has shown resilience in 2024, with strong retail sales and a steady unemployment rate around 4%.
Luzzetti noted that the economy has solid growth momentum, especially after the Fed’s recent rate cuts.