Trump’s Return Nudges Economists’ Inflation Outlook HigherThe Wall Street Journal reports Trump’s Return Nudges Economists’ Inflation Outlook Higher

Economists are starting to model the effects of President-elect Donald Trump’s plans to raise tariffs, cut taxes and restrict immigration. The upshot: Inflation and interest rates are likely to be higher for at least the next two years than forecasters anticipated before the election.

“Risks to inflation and interest rates are to the upside with a Trump administration,” said Augustine Faucher, chief economist at PNC Financial Services Group. 

In the latest Journal survey, economists also raised their inflation forecasts for 2026, projecting the CPI will rise 2.6% at the end of that year instead of the 2.3% they expected in October, according to the survey, conducted Jan. 10-14. That would still be a lower inflation rate than the 2.9% recorded in December.

The Journal asked economists what tariffs they assumed that Trump would impose. On average, those responding projected import duties would rise 23 percentage points on China and 6 percentage points on the rest of the world, for a 10-percentage-point higher average tariff on everyone. This, they estimated, would add 0.5 percentage point to the CPI inflation rate in the fourth quarter of this year.

“Tariffs are particularly ill-timed given the persistence of inflation following the pandemic-induced price shock,” said Joe Brusuelas, chief economist at RSM US.

Those changes in the outlook, combined with the possible effects of Trump’s economic policies, prompted Federal Reserve policymakers to bump up their 2025 inflation forecasts, as well.

Faced with stickier inflation, economists expect the Fed to keep interest rates higher through 2027 than previously forecast. The midpoint of the range of the Fed funds rate, currently 4.375%, is now seen ending the year at 3.89%, up from the October average projection of 3.3%.

Economists now expect the 10-year Treasury bond yield to end 2025 at 4.4%, up from an October projection of 3.7% though down from 4.6% Friday afternoon. All else equal, that would likely translate into higher mortgage rates by a similar magnitude.

CPI Forecast WSJ Survey Economists inflation forecast, data from WSJ, chart by MishThe journal provided a nice data download of 76 predictions.I picked three widely recognized names out of the pack: Mark Zandi at Moody’s Analytics, Lawrence Yun at the National Association of Realtors, and Jan Hatzius at Goldman Sachs.The numbers show vary divergent thinking. Yun and Hatzius have inflation bottoming in June of 2026, while Zandi and Amy Crews Cutts at AC Cutts & Associates have it peaking.At 4.5 percent, Cutts has the highest forecast of any economist through December of 2027. But Cutts was not always the highest.Selma Hepp at Corelogic was high for June of 2025 at 4.3 percent. Cutts was 2.6 percent.
On the Low SideSean M. Snaith at the University of Central Florida comes in at 2.0 percent for June of 2025 with Yun at 2.1 percent.For June of 2026, James F. Smith at EconForecaster has 1.9 percent with Yun at 2.0 percent.For December of 2027, Joel Naroff at Naroff Economics has inflation at 1.60 percent. He is also low for June of 2026 at 1.70 percent.
June 2025

Dec 2025

June 2026

Dec 2026

June 2027

Dec 2027

On AverageOn average, economists forecast slow, steady improvement: 2.80, 2.69, 2.66, 2.57, 2.40, and 2.32.On average, the Fed will be struggling for years, assuming it keeps its 2.0 percent goal.
Pessimists vs OptimistsIf the pessimists are correct every month, we would see 4.3, 4.2, 4.5, 4.3, 3.9, and 3.7.If the optimists are correct every month, we would see 2.0, 1.9, 1.9, 1.7, 1.7, and 1.6.
Recession ForecastOnly three of 76 economists have a 12-moth recession probability over 50 percent.Amy Crews Cutts has the recession probability at 65 percent.Brian S. Wesbury/Robert Stein at First Trust Advisors has recession probability at 55 percent as does Joel Naroff at Naroff Economics.The average probability is 22 percent. Jan Hatzius at Goldman Sachs did not answer. Yun and Zandi are both at 20 percent.James F. Smith at EconForecaster has probability of recession at 1 percent (a preposterous number). Christopher Thornberg at Beacon Economics has the recession probability at 5 percent, another preposterous number.It’s possible there is no recession. But the range of things Trump might do and how China and the world might respond is so extreme that any forecast under 10 percent seems silly. Also the Fed might easily overreact to something it sees.
Difficult Inflation ProjectionRepublicans have a slim majority. My fear is Republicans will buy votes (more of this in return for more of that), resulting in a nasty brew of inflation.If Trump gets his way with all of the economic ideas he has presented, deficits and inflation rate to soar.However, this is not an easy projection because we do not know what Trump will actually do with tariffs, immigration policy, and economic policy.Also Tariffs might prompt China to withhold exports of rare earth materials, shutting down chips, planes, and weapons manufacturing. Thus, tariffs could easily crash global trade, with uncertain outcomes.My inclination is that economists are correct to factor in more inflation, but the path from here to there will not be anywhere near as smooth as the slow, steady average forecast suggests.Finally, a quick recession could change many things, cooling inflation for now, with a nasty spring back later. That may be the rationale of Amy Crews Cutts.
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My first, second, and third case is Trump will not bring in as much revenue with tariffs as he bragged.If so, and Trump gets the economic policies that he seeks, deficits will soar with inflationary pressures.More By This Author:The U.S. Trade Deficit With China Is Understated By As Much As 30 Percent Housing Starts Surge 15.8 Percent, Single-Family Up 3.3 PercentWhen Do Completed Housing Units For Sale Pressure Home Prices And Rent?