Inflation rates have dramatically fallen since they topped 9% in June 2022. The current annual inflation rate is 2.5%, the lowest it’s been since February 2021. That’s a significant drop; however, Americans are still feeling the pains of lingering inflation and may be worried about what the future holds. Will inflation keep going down in 2025?
Now, mind you, this is a complex subject, and it takes a multilayered understanding of the economy to really grasp it. So, to help make the matter more digestible, GOBankingRates consulted experts to weigh in with bite-sized insights on the future of inflation.
To get a sense of where inflation could be headed, it’s useful to know where we stand now and what the Fed’s goal for inflation is.
“Inflation, as measured by the CPI [consumer price index], has fallen dramatically from a recent high of over 9.0% to what is expected to be a reading of 3.2% when the next monthly reading is revealed,” said Ed Mahaffy, CFP, ChFC, president and senior portfolio manager at ClientFirst Wealth Management . “However, the pace of this progress is slowing, and the Fed’s stated 2% CPI target may prove to be a bridge too far.”
One of the stranger and more insidious aspects of inflation is that even when rates fall, your cost of living doesn’t necessarily fall with it.
“The CPI over-weights the price of housing – more than any other developed nation by a long shot, comprising over 30% of the index,” Mahaffy said. “Even if the CPI falls from here by another point or so, do not expect your cost of living to fall in tandem. The CPI is now hovering just above 3.0%, down from a high of 9.1% in June of 2022. Has your cost of living fallen by 6%? I doubt it.”
The sector that may be the most difficult to recover from high inflation is housing.
“It is likely we will see incremental gains on the inflation target from other sectors, but with housing still in tight supply and building starts being low this year, the shelter cost component faces headwinds,” said Dave Koch, managing director of advisory services at Abrigo . “Lower mortgage rates should entice more buying, but without more affordable supply, there is little room for relief.”
Taking Down Inflation Is a Long Process
Though the Fed’s efforts to lower inflation have been mostly successful, inflation is a difficult beast to tame and it doesn’t die down without a long fight.
“Inflation doesn’t just disappear overnight,” said Joseph Camberato, CEO at National Business Capital . “The Fed has done a solid job slowing down inflation after the Covid stimulus money shook the economy, but that doesn’t mean it’s gone or will keep dropping without some ups and downs.”
There’s Some Reason for Optimism
Though the Fed’s goal for the annual inflation rate to hit 2% may not be realized, where we are now with inflation is actually not bad.
“There’s been real progress since June 2022,” Camberato said. “Inflation will stay a little above 2% for now, in my opinion), and at some point, we might hit that target. But realistically, inflation tends to hover around 3%, and that’s a normal range.
“What’s key here is the Fed’s decision to start lowering rates,” Camberato said. “That shows it feels good about the progress so far, and that the economy is strong enough to bounce back. As the Fed pumps more money into the system, we might see some small bumps, but I’m confident the days of really high inflation are behind us for a while.”
Nick Brown, head of economic insights at Prevedere , also suggested there’s reason for optimism – but we’ll need to be patient.
“Overall, we anticipate inflation to continue down a steady path toward the Federal Reserve’s target, with headline and core CPI both projected to drop below 2% in Q2 2025 and hover around the 2% range through the beginning of 2026,” Brown said. “We expect shelter rates to slow but remain slightly elevated due to short supply and increased activity in housing as mortgage rates begin to decline, but continued disinflation across core commodities and new and used vehicles will help push us toward the 2% target in 2025.”
We Could Get a Better Idea After We Get Our Next President
It’s not quite feasible to make exact predictions about the economy during a presidential election year, particularly not when the two main candidates are so wildly dissimilar when it comes to policy (and everything else). We will have a better idea of what to expect once we know who our next commander-in-chief is.
But even then, the future of inflation will take time to make landfall.
“With the upcoming presidential election, a clearer view of likely plans and costs will play into overall inflation levels, just maybe not in 2025,” Koch said.
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