Economists have revised their US inflation forecasts for the next year upwards, citing tariff concerns, and now anticipate fewer interest rate cuts from the Federal Reserve than previously predicted.
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According to Bloomberg’s latest monthly economist survey, the core personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge excluding food and energy, is expected to rise by 2.5% on average next year. This surpasses the 2.3% projection from the previous month’s survey.
Economists Adjust Expectations for Fed Rate Cuts
While economists still expect the Fed to lower rates at its upcoming meeting, marking the third consecutive cut, they now foresee only three additional quarter-point reductions in 2025, occurring in March, June, and September. The federal funds rate is projected to settle within a range of 3.5% to 3.75% by the end of 2025.
Tariffs and Trade Tensions Fuel Inflation Concerns
“Tariffs pose a significant concern,” notes James Knightley, chief international economist at ING. While factors such as substituting US-made products and the strength of the dollar may partially offset the impact, “US consumers will likely experience a squeeze on living standards, and US exporters could face challenges from retaliatory measures.” Knightley anticipates a potential scenario of “higher inflation and slower growth.”
Although recent business surveys indicate increased optimism regarding potential policy changes under the incoming administration, including deregulation, concerns remain about the inflationary pressures of higher tariffs and tax cuts aimed at stimulating demand.
Import Growth and Pre-Tariff Stockpiling
The Bloomberg survey, conducted among 83 economists from December 11-16, also reveals upward revisions for import growth during the first quarter of 2025. This suggests that some companies may be accelerating stockpiling efforts in anticipation of tariff increases and potential disruptions from a possible port strike on the East and Gulf coasts.
Employment and Economic Growth Projections
Employment projections for 2025 remain largely unchanged, with an estimated average monthly payroll growth of 121,000, slightly down from the previous estimate of 126,000. Economists have also modestly raised their 2025 economic growth outlook, forecasting an average GDP growth of 2.1%, up from the previous 2% projection.
Conclusion: Navigating a Complex Economic Landscape
The upward revision in inflation projections and the reduced expectation for Fed rate cuts highlight the complex economic landscape ahead. Tariff concerns, potential trade tensions, and the interplay between fiscal stimulus and inflationary pressures will likely continue to shape the economic outlook in the coming year. While optimism exists regarding potential policy changes, navigating these challenges will be crucial for sustained economic growth.
