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Question #5 for 2025: What will the YoY core inflation rate be in December 2025?

Earlier I posted some questions on my blog for next year: Ten Economic Questions for 2025. Some of these questions concern real estate (inventory, house prices, housing starts, new home sales), and I posted thoughts on those in the newsletter (others like GDP and employment will be on this blog).

I’m adding some thoughts and predictions for each question.

Here is a review of the Ten Economic Questions for 2024.

5) Inflation: Core PCE was up 2.8% YoY through November. This was down from a peak of 5.6% in early 2022.  The FOMC is forecasting the YoY change in core PCE will be in the 2.5% to 2.7% range in Q4 2025. Will the core inflation rate decrease further in 2025, and what will the YoY core inflation rate be in December 2025?

Although there are different measures for inflation, they all show inflation above the Fed’s 2% inflation target on a year-over-year basis.

Note:  I follow several measures of inflation, including median CPI and trimmed-mean CPI from the Cleveland Fed.  Also core PCE prices (monthly from the BEA) and core CPI (from the BLS).

Inflation MeasuresClick on graph for larger image.

On a year-over-year basis, the median CPI rose 3.9%, the trimmed-mean CPI rose 3.2%, and the CPI less food and energy rose 3.3%. 

Core PCE is for October was up 2.8% YoY.
The Fed is projecting core PCE inflation will decrease to 2.5% to 2.7% by Q4 2025. 

However, over the last 6 months, inflation is already at or lower than the Fed’s Q4 target (annualized):


PCE Price Index: 2.1% 
Core PCE Prices: 2.5%

The good news is we should expect a further decline in housing inflation (asking rents have been flat for 2 years, and it takes time for the previous rent increases to filter through to renewals).  And inflation was fairly high in Q1 last year – so it is likely YoY measures of inflation will decline further in Q1.
In general, I’m ignoring policy changes – those will mostly impact the economy in 2026 since it takes time to enact new policies and for the impact to occur.  However, tariffs could be implemented quickly and depending on the policy this could push up the inflation rate.

From Goldman Sachs economists today:

“By the end of 2025, we expect the underlying trend to fall to 2.1%, but we expect a one-time tariff boost to raise core PCE inflation to 2.4%.”

My guess is core PCE inflation (year-over-year) will decrease in 2025 (from the current 2.8%) but still be above the Fed’s 2% target by Q4 2025.