Kiplinger Inflation Outlook: Elevated Inflation Persists

last updated 12 February 2025

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Inflation ticked up to 3.0% in January, and core inflation (prices excluding those for food and energy) also inched up, to 3.3%. Core inflation has changed little over the past eight months, and may not be coming down much this year. On the positive side, shelter inflation continued at its new, lower level in January, and medical services costs were unchanged. Going forward, shelter costs should contribute less to inflation than they have in the previous four years. New-vehicle prices were unchanged, but used-vehicle prices picked up notably. The price of groceries rose by a higher-than-usual 0.5% in January, boosted by egg prices that soared 15.2% for the month and 53% over the past 12 months. The avian flu has severely reduced flocks at egg-laying chicken farms.

Services costs outside of housing showed continued upward momentum. Hospital costs and health insurance had larger-than-normal rises, while car insurance jumped 2.0%; airfares, 1.2%; and recreation services, 1.4%.

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The Federal Reserve will not like the lack of progress in fighting inflation. Stubbornly elevated inflation was likely the reason the Fed did not cut interest rates at its January 29 policy meeting, and why it will likely continue to hold off on cutting rates for another six months or so. While goods price increases have fallen back into a normal range, the Fed is worried about the strength in services inflation, because it tends to be persistent. Also, the recent University of Michigan consumer sentiment survey showed that consumer expectations of inflation were rising, not falling — perhaps because of this lack of progress, plus fears of the impact of possible new tariffs on consumer prices.

While news headlines focus on the Consumer Price Index, note that the Fed’s goal of 2% inflation is based on a measure called the personal consumption expenditures deflator. The PCE deflator tends to run about half a percentage point below the CPI these days. The PCE deflator excluding food and energy rose at a 2.8% rate for the 12 months ending in December, compared with the core CPI’s 3.3% in January. This lower number is still too high for the Fed, and more important, it also has shown little sign of declining for the past eight months.

David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.