2025 Inflation: Challenges Ahead Despite Signs of Moderation

Inflation forecasts for 2025 point to a potential moderation back toward pre-pandemic levels, with several major institutions projecting rates around 2% to 2.5%. The International Monetary Fund (IMF), for example, expects global inflation to decrease from 6.7% in 2023 to 5.8% in 2024, with a further drop to 4.3% in 2025. Developed countries are anticipated to experience faster reductions, while the Federal Reserve has signaled a return to its 2% inflation target by 2025.

While the forecast for 2025 points to a decline in inflation, there are factors emphasizing the need for vigilant pricing strategies and preparation for unforeseen pressures. With a new administration in office by early 2025, additional inflationary pressures may emerge, and pricing teams must keep leaders informed of potential challenges on the horizon.

Increased Import Tariffs

New tariffs projected for 2025 could have a substantial impact on inflation and consumer prices, as tariffs generally increase the cost of imported goods. The scale of this impact depends on which products are targeted, supply chain adaptability, and how companies manage these additional costs.

1. Immediate Price Pressures and Inflationary Impact Tariffs raise costs on imported goods, creating an immediate rise in consumer prices, especially in sectors heavily dependent on imports.
2. Long-Term Supply Chain Adjustments and Production Costs Over time, tariffs can push companies to source materials elsewhere, reducing reliance on affected imports. While this may moderate prices eventually, shifting suppliers incurs additional costs as companies establish new relationships. This could result in prolonged inflationary effects.
3. Impact on Domestic Production and Price Dynamics Tariffs are often meant to protect local industries by making imports less competitive. However, if domestic supply can’t immediately meet demand, reduced competition can lead to domestic price increases, compounding inflation.

Tightening Labor Market

Expected labor shortages in 2025, partly due to stricter immigration policies, could increase inflation and raise consumer prices. Immigration has traditionally provided essential labor for many sectors, especially low-wage industries. Reducing this labor supply will create both immediate and long-term impacts on businesses and consumers.

1. Wage Pressures and Cost-Push Inflation A smaller labor pool intensifies competition for workers, particularly in agriculture, construction, hospitality, and healthcare. As employers raise wages to attract talent, costs rise, and companies pass these on to consumers in the form of higher prices.
2. Reduced Productivity and Supply Constraints Labor shortages can limit productivity and output. For example, a lack of agricultural workers can reduce harvests, pushing up prices for produce. Similar constraints across industries may add inflationary pressure as reduced supply meets steady demand.
3. Impact on Housing and Construction Prices The construction industry is particularly affected by labor shortages, as projects may slow due to lack of workers. This can reduce housing availability, driving up real estate prices and adding inflationary pressure, especially in urban areas where demand is high.

Currency Wars

Currency wars in 2025, where countries engage in competitive devaluations to boost exports, may lead to inflation and fluctuating consumer prices. With rising protectionism, tariffs, and geopolitical conflicts, countries may devalue their currencies to stay competitive, affecting import costs, raw materials, and economic stability.

1. Imported Inflation and Rising Consumer Prices Currency devaluation makes imports more expensive, as more local currency is needed to purchase foreign goods. Countries reliant on imports, such as energy or consumer goods, may see substantial price hikes.
2. Cost of Raw Materials and Manufacturing Fluctuating exchange rates affect raw material costs, especially for global commodities. Rising input costs increase production expenses, adding inflationary pressure across supply chains.
3. Competitive Devaluations and Retaliatory Measures When countries simultaneously devalue their currencies, a “race to the bottom” can ensue. This can lead to global trade disruption, unstable exchange rates, and supply chain complications, contributing to inflationary pressures.

Protection of Strategic Raw Materials & Precious Metals

Protectionist policies restricting strategic raw materials in 2025 could drive inflation across multiple industries. Countries safeguarding critical resources may disrupt global supply chains, raising costs for manufacturers and consumers.

1. Increased Raw Material Costs and Supply Chain Constraints Restrictions on essential materials, like rare earth metals and semiconductors, drive up prices by limiting supply. Industries reliant on these materials, such as electronics and automotive, often pass these added costs to consumers.
2. Inflationary Pressures from Strategic Stockpiling Countries often stockpile resources to ensure long-term availability, which can tighten open-market supply and drive prices higher. Competition for these resources intensifies, increasing costs for manufacturers and, eventually, consumers.
3. Concentration of Resources and Power Among Key Suppliers Protectionist policies can concentrate control of critical materials in a few countries, enabling monopolistic pricing practices that raise costs across affected industries.

Concluding Thoughts

The future remains unpredictable, and new U.S. economic policies in 2025 could trigger ripple effects. Pricing teams should remain vigilant, as inflationary pressures may resurface. In 2024, inflation appeared to stabilize, but this could be temporary. Now is the time to prepare, discuss inflation risks, ready your team for potential pricing adjustments, and communicate with customers about potential impacts. By staying proactive, businesses can navigate the challenges ahead.