US Inflation Outlook for 2025

US inflation rose to 3% in January 2024, partly due to low base effects. This marks the third consecutive monthly increase. Several factors will influence the inflation outlook for 2025. Let's take a look. 

Let’s explore the key predictions for the year.

Core inflation expected to rise to 2.5% 

Economists have raised US inflation projections for 2025 due to tariff concerns. The core personal consumption expenditures (PCE) price index excludes food and energy and is now expected to rise by 2.5% in 2025. This is up from the 2.3% forecast in November 2024. The Federal Reserve has anticipated fewer rate cuts, with only three quarter-point reductions expected in 2025. The projected federal funds rate by January 2025 is 3.5% to 3.75%.

Factors like US-made product substitutes and a strong Dollar could reduce some impact on the increasing USE tariffs. Despite this, consumers may feel the squeeze on living standards and retaliatory measures could harm exporters. Overall, inflation and slower growth seem likely.

Business optimism has risen, but higher tariffs and tax cuts may keep inflation high. GDP growth is now forecast at 2.1%, up from 2%. Employment projections remain stable, with payrolls expected to grow by about 121,000.

US growth to slow down amid easing inflation 

US growth in 2024 is projected at 2.8%. However, growth is expected to slow in 2025, with the OECD predicting 2.4% and the IMF forecasting 2.2%. The global economy is expected to grow at 3.3% in 2025, driven by lower inflation, reduced interest rates, and increased employment. This is positive for demand and spending.

In the US, growth outpaced other developed countries, but the Eurozone has faced slower growth due to manufacturing slowdowns and inflation control. After slow growth, China has introduced fiscal and monetary stimulus for 2025. Geopolitical events, such as conflicts in the Middle East and the Russia-Ukraine crisis, could affect energy prices and inflation globally, potentially slowing growth.

Unemployment, currently at 4.2%, remains a key indicator, as it directly impacts consumption. Inflation is at 2.7%.

US inflation to stabilize at 2.1% by end of 2025

Goldman Sachs predicts that US core PCE inflation will stabilize at 2.1% by the end of 2025, as inflation pressures ease. A significant factor in this moderation is the cooling of wage pressures, which have played a key role in inflation. 

Although tariffs may raise inflation by 0.3%, this increase will be a one-time effect. With the labor market rebalancing and consumer spending staying strong, inflation is expected to trend back toward the Federal Reserve's target. 

However, housing costs remain a source of persistent inflation, as official housing prices catch up with market rents. Despite potential tariff impacts, a strong labor market and tax cuts are expected to support economic growth, helping inflation stabilize within the target range.

Cooling wage pressures expected to moderate inflation

Wage pressures in the US economy are showing signs of cooling, which should help moderate inflation. As labor markets stabilize and immigration slows, trend job growth will continue. This can reduce the need for high wages to attract workers. 

The reduction will also lower the pressure on prices, particularly in sectors where wage growth had previously been a driving force. The cooling of wage pressures, combined with tax cuts and reduced immigration, is expected to keep inflation under control. 

Although tariffs may cause short-term price increases, the long-term trend suggests that inflation will ease as the labor market normalizes and consumption patterns adjust. As a result, the US economy should experience normalized inflation in the coming years, approaching the 2% target by late 2025.

Tariffs and immigration slowdown to impact inflation

Tariff increases, particularly on imports from China, are expected to raise the effective tariff rate by 3 to 4 percentage points, leading to a one-time inflation bump. Other factors, such as a cooling labor market and slower immigration, may partially offset this increase in costs. The expected slowdown in immigration will reduce labor force growth, impacting consumption patterns and moderating wage-driven inflation. 

While tariffs will contribute to short-term price hikes, their impact is expected to be temporary. Over the longer term, slower immigration and tax cuts are likely to provide economic support, boosting consumption and keeping inflation pressures from rising further. The net effect of these changes will likely stabilize inflation around 2.1% by the end of 2025 as discussed above.

The Fed to cut rates and impact inflation 

The Federal Reserve's decision to cut interest rates in December 2024 reflects growing concerns over inflation and potential economic changes under the incoming Trump administration. Fed Chair Jerome Powell emphasized that further rate reductions will depend on the continued progress in reducing inflation, which remains stubbornly high. While inflation has improved since peaking in 2022, it has stalled recently (as of 2024), particularly in shelter costs, which are rising more slowly than expected. 
 
Powell noted that inflationary pressures are shifting. The Fed is closely monitoring potential impacts from Trump's proposed policies, such as higher tariffs and tax cuts. These could push inflation higher, with the core PCE price index projected to be 2.5% by 2025, up from the Fed's target of 2%. 

The uncertainty surrounding Trump’s economic policies, particularly tariffs, is causing a shift in the Fed’s projections. As a result, the pace of rate cuts may slow, with the expectation of just two quarter-percentage-point cuts by the end of 2025. Powell highlighted that any further adjustments will depend on inflation progress, the evolving economic outlook, and risk factors that could affect inflation and growth.

Will US inflation settle in 2025?

US inflation is projected to stabilize at 2.1% by the end of 2025, with cooling wage pressures and a rebalanced labor market contributing to this moderation. While tariffs may cause a temporary price increase, factors like tax cuts and slower immigration should support economic growth. However, housing costs could remain a persistent challenge.