Predicting the exact trajectory of inflation is complex for consumers and policymakers alike. A breakdown of the factors influencing inflation in 2025, including the potential impact of tariffs is important. Regardless, Chairman Jerome Powell says the Fed is “well positioned” for the risks and uncertainties” that lay ahead of us. Here’s what we know:
Will Inflation Continue to Rise in 2025?
In order to measure the rate of inflation, currently hovering around 2.4 percent, the Federal Reserve relies primarily on the Consumer Price Index (CPI). The CPI is published by the U.S. Bureau of Labor Statistics (BLS) each month. This report measures the change in cost of goods including food, energy, apparel and more to demonstrate the average change in prices of those goods over time, including from the previous month and over a 12-month period. Recent data shows that inflation ticked up in January 2025, after a period of decline. This data indicates that the fight against inflation is not yet over, especially as the Fed’s target of 2.0 percent rates remain out-of-reach.
Here are some factors that could contribute to continued inflationary pressures in 2025:
- Persistent Supply Chain Issues: While some supply chain bottlenecks have eased, others remain, and new disruptions can always occur. These can lead to higher prices for goods and services. For buyers who were hoping for greater purchasing power, the price of everything from eggs to airplane tickets has increased in recent weeks.
- Strong Labor Market: A tight labor market can lead to wage pressures, as businesses compete for workers. These increased labor costs can then be passed on to consumers in the form of higher prices.
- Geopolitical Instability: Events like the war in Ukraine can lead to volatility in energy and commodity prices, contributing to inflation. Consumers have seen this turmoil play out in inconsistent fuel prices.
- Housing Costs: Rising rents and housing prices can be a significant driver of inflation, and these costs may continue to climb in 2025.
- Consumer Demand: If consumer spending remains strong, businesses may have more pricing power, allowing them to raise prices without hurting demand.
However, there are also factors that could help to moderate inflation:
- Federal Reserve Policy: The Federal Reserve's monetary policy decisions, such as interest rate hikes, can help to cool down the economy and reduce inflationary pressures. The Fed is currently fighting to curb inflation against many external economic pressures, including tariffs. Despite the rise of real income to a median of $80,610 per U.S. household, the rising prices in goods, services, and housing means that purchasing power is weakened.
- Easing Supply Chain Issues: As supply chains continue to recover, prices for some goods may decrease.
- Slowing Economic Growth: If the economy slows down, consumer demand may weaken, which could lead businesses to lower prices or even to deflation.
Overall, the outlook for inflation in 2025 is uncertain. It will depend on the interplay of these various factors. While recent data suggests that inflation may be more persistent than previously thought, it is still possible that it could moderate later in the year. For example, the Fed has tempered expectations about additional rate cuts amidst inflationary pressures.
How Will Tariffs Impact the Economy?
Tariffs are taxes on imported goods, and they can have a significant impact on the economy. Here are some key effects:
- Increased Prices: Tariffs make imported goods more expensive, which can lead to higher prices for consumers. This can contribute to inflation.
- Reduced Trade: Tariffs can reduce the volume of international trade, as they make it more expensive for businesses to import goods. This can lead to decreased economic efficiency and reduced consumer choice.
- Retaliation: When one country imposes tariffs, other countries may retaliate with their own tariffs. This can lead to trade wars, which can harm the economies of all countries involved.
- Impact on Businesses: Tariffs can make it more difficult for businesses to compete, as they may pay higher prices for imported inputs. This can lead to job losses and reduced economic growth.
- Shifting Supply Chains: Tariffs can encourage businesses to move their supply chains away from countries that have tariffs on their goods. This can lead to disruptions and increased costs.
The overall impact of tariffs on the economy will depend on the size and scope of the tariffs, as well as the reactions of other countries. In general, economists believe that tariffs are harmful to the economy, as they lead to higher prices, reduced trade, and decreased economic efficiency.
What Should a Small Business Owner Know?
Navigating the intertwined challenges of tariffs and inflation in 2025 requires proactive planning. Small business owners should prioritize their operational and financial resilience. First, they can diversify their supply chains to reduce reliance on a single source, including from countries impacted by tariffs. Second, they can explore strategies to manage rising costs. Optimize pricing models, increase operational efficiency, and potentially absorb cost increases to maintain competitiveness. Finally, staying informed about economic forecasts and policy changes to be better positioned for success in an uncertain economic climate.
