Wednesday, April 2, 2025

Economists Warn Inflation Will Persist in 2025, Blaming High Tariffs and Service Sector Costs

A gas station in Swannanoa, North Carolina, pictured on October 3, 2024. / Reuters

Economists are warning that inflation, the primary concern for the U.S. economy in 2024, will persist into the coming year.

Experts predict that prices will inevitably climb if Donald Trump’s second administration, set to take office on January 20, implements high tariffs on imported goods.

Foreign media outlets report that Wall Street is growing increasingly anxious about a potential rebound in U.S. prices this year. Despite last year’s decline, inflation has stubbornly remained above the Federal Reserve’s target of 2%.

In a year-end interview with Yahoo Finance, Deutsche Bank’s chief economist, Matthew Luzzetti, noted that although they anticipate a gradual moderation of inflation from current levels, it is likely to remain uncomfortably high for the Federal Reserve.

The U.S. Consumer Price Index (CPI) peaked at 9.1% year-over-year in September 2022 but fell to 2.4% last September due to the Fed’s interest rate hikes. Since then, there has been a slight upward trend.

Notably, the core price index, which excludes volatile food and energy prices, rose 3.3% in November, surpassing expectations.

During the same period, the Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s key inflation measure, exceeded 2%, reaching 2.8%.

Luzzetti pointed out that the service sector will drive future U.S. inflation, highlighting industries such as insurance, healthcare, and airline fares.

He also pointed out that housing cost inflation remains high.

The Fed has revised its forecast in its outlook report, raising this year’s peak U.S. CPI projection from 2.2% to 2.5%. They anticipate it will decrease to 2.2% by 2026, with the 2.0% target potentially achievable by 2027.

This forecast closely aligns with Wall Street’s projections.

Nancy Vanden Houten, an economist at Oxford Economics, addressed the risks associated with the incoming Trump administration’s proposed tariffs and immigration policies, stating, “These factors point towards higher inflation.”

Economists believe that President-elect Trump’s key promises of high tariffs on imported goods, corporate tax cuts, and reduced immigration will fuel inflation and complicate the Fed’s plans for interest rate cuts.

Nobel laureate Joseph Stiglitz, a professor at Columbia University, remarked at a Yahoo Finance event last November that while the U.S. economy has achieved a soft landing, “this will come to an end on January 20,” referring to Trump’s inauguration date.

Trump has announced plans to impose a 10% tariff on all imported goods, with a staggering 60% tariff on products from China.

Stiglitz criticized this policy, arguing that high tariffs would drive up prices and lead workers to demand higher wages while also warning of potential retaliatory tariffs from trading partners.

He cautioned that a combination of foreign retaliation and high interest rates could trigger a global economic slowdown, resulting in a worst-case scenario of inflation coupled with stagnation or low growth.

French investment bank BNP Paribas also predicted that U.S. import tariffs would lead to significant price increases from the end of this year through 2026, forcing the Fed to pause its interest rate cuts.

They project the U.S. CPI to reach 2.9% by the end of this year and climb to 3.9% by the end of 2026.

U.S. Consumer Price Index (CPI) trends. Unit: %. *Year-over-year comparison. / U.S. Department of Labor, tradingeconomics.com

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