Next year, various forces may lead to inflation in the USA remaining above the Federal Reserve's target of 2%, while undermining investors’ hopes for relief from inflation and multiple rate cuts from the Federal Reserve.

The main risk for 2025 is the tariff and immigration proposals of incoming President Trump. Market observers say that until details of these plans emerge after Trump's inauguration in January, market participants remain hopeful that inflation can be kept in check, viewing Trump’s remarks as mere negotiation tactics.

However, investors and traders may ultimately be mistaken as they underestimate the possibility of a resurgence in inflation in the USA.

On Wall Street, Goldman Sachs Chief Economist Jan Hatzius estimates that if the tariffs proposed by Trump are implemented, they could raise the Federal Reserve's preferred inflation indicator—the core inflation reading of the Personal Consumption Expenditures (PCE) index—by nearly 1%.

Traders have already taken Hatzius’s views into account and incorporated part of them into their forecasts for next year’s Consumer Price Index (CPI). Traders now expect that the CPI data for November, due out on Wednesday, will rise again, with core CPI inflation remaining above 2% until October of next year.

Meanwhile, Nuveen, a global investment management company based in New York with assets under management of $1.3 trillion, is considering the likelihood of its soft landing scenario going wrong.

Nuveen Global Fixed Income Chief Investment Officer Anders Persson stated: 'The tail risk we are concerned about is the scenario where the Federal Reserve has to make a 180-degree turn and start raising interest rates, and the market should be vigilant about this. This means the economy will start to 'stagnate,' and we may face a more severe stagflation scenario. However, we currently do not call this our base case.'

Persons stated over the phone, "We can be absolutely certain that inflation rates will be higher than the Federal Reserve's 2% target in the next 12 months, and possibly over the next few years. Tariffs will create some upward pressure on inflation in 2025, and we are also noting the immigration issues in Trump's plan."

Persons said, "We do believe that the speed of inflation decline may not be as fast as expected, and the market will push up U.S. Treasury yields. But there are many changing factors whose details we do not understand, so it is still too early to make clear judgments about next year's inflation level."

Currently, Persons' view is that for investors not holding fixed-income assets, fixed-income is the best choice after weighing risk and return, as U.S. Treasury yields will provide relatively attractive return potential in the next 12 months.

If Nuveen's judgment is wrong and the economy falls into a more severe stagnation scenario—high inflation with slowing economic growth—"U.S. stocks will face challenges, so cash will be the best-performing asset class."

Derek Tang, an economist at Monetary Policy Analytics, mentioned, "The nature of post-pandemic inflation is that COVID has changed people's perceptions. Even if inflation expectations stabilize, people still feel significantly harmed and are prepared for more price increases." The company was founded by former Federal Reserve governor Larry Meyer.

Tang stated over the phone, "Companies and households are now adapting to higher inflation, not because they want to, but because it is a reality. If we are hit again, the public may turn to an inflation mentality and could fall into a wage-price spiral."

Tang pointed out that if Wednesday's CPI report has an unexpected upside surprise and the previous value is revised upward, "this will change policymakers' perceptions of what is happening." He added, "This affects more of the story for 2025 rather than the story of rate cuts in December," referring to the Federal Reserve potentially slowing down rate cuts in 2025.

Tang said, "The policy rate is still above neutral levels, so there is still some room for rate cuts before officials have to answer really tricky questions."

Editor/ping