​US inflation has oscillated between roughly 3.5% and 2% since the beginning of 2025, reflecting a push-and-pull between easing goods inflation, slower shelter disinflation, and still-resilient services driven by wage growth and consumption, while energy and food prices added intermittent volatility rather than a sustained trend. Looking ahead, we expect headline inflation to average around 2.5% through 2025, with downside risks toward 1.5% if goods deflation accelerates and shelter inflation cools faster than expected, and upside risks toward 4% should wage pressures, energy prices, or renewed supply-side disruptions re-emerge. The labour market has begun to soften, with unemployment gradually rising but still remaining low by historical standards, signalling cooling rather than distress; we anticipate a further modest uptick before a stabilisation and subsequent decline into the 2026 midterm election cycle as policy easing and fiscal dynamics support activity. On monetary policy, the Federal Reserve delivered rate cuts across 2024 and 2025, bringing the policy rate to around 3.75%, though the easing cycle was notably delayed as policymakers prioritised confidence that inflation pressures were durably contained. Despite a more hawkish tone in recent communications, we expect up to three additional cuts in 2026 as growth moderates and inflation converges toward target, a year that will also be institutionally significant given that the leadership decision regarding Jerome Powell’s succession is scheduled for 2026, potentially shaping the medium-term policy outlook. Figure 1 summarizes the recent developments and expectations for 2026.

​So far, 2025 has been shaped by sharp swings in financial markets, driven by geopolitical shocks, shifting monetary policy expectations, and evolving macroeconomic conditions. The year began with strong risk appetite, fuelled by optimism over disinflation and AI-led corporate growth, but momentum faltered in April when the US announced sweeping “Liberation Day” tariffs, reigniting fears of a global trade war. Equity markets corrected sharply before stabilising in early summer, supported by resilient corporate earnings and easing volatility. Inflation has proven stickier than expected in most major economies, prompting central banks, especially the Fed and the BoE, to delay or temper rate-cut expectations. The US dollar weakened in the first half of the year, boosting gold prices to multi-year highs as investors sought safe-haven assets. Overall, 2025 has presented a complex mix of resilience and risk, leaving investors to navigate an unusually uncertain macroeconomic and geopolitical backdrop.
Inflation trends in 2025 have underscored the challenge facing central banks in the United States, the Euro Area, and the United Kingdom, with price pressures proving more persistent than policymakers had anticipated. In the US, headline CPI has eased from its 2022 and 2023 peaks but remains above the Federal Reserve’s 2% target. While core inflation has been slower to decline, driven by stubborn services and shelter costs. The Euro Area has seen a similar pattern, with headline inflation moderating on the back of lower energy prices but core readings staying elevated due to wage growth and resilient domestic demand. The UK has faced the stickiest inflation among the three, with both headline and core measures remaining well above target despite easing commodity costs—reflecting underlying pressures in the labour market and housing sector. As shown in Figure 1, inflation has come down substantially since 2023, the Euro Area is the only geography of the three that has maintained an inflation rate at or below 2% for multiple months. In contrast, the UK’s inflation rate has begun to soar again and remains well above 3% in recent months.
Interest rate policy has reflected these dynamics, with the Fed and the BoE both delaying widely expected rate cuts as inflation progress slowed in the first half of the year. The Fed has maintained rates at close to their multi-year highs, emphasising the need for sustained evidence of disinflation before easing. The BoE has lowered its interest rates more steadily in 2025 than the US, but the country has to balance cuts with currently rising inflation. In contrast, the European Central Bank has begun to signal a cautious easing path, supported by weaker growth data and a more pronounced decline in headline inflation across the bloc. Elsewhere, Japan’s policy shift away from ultra-loose conditions has stood in sharp contrast, underscoring the divergence in global monetary stances and adding a further layer of complexity to capital flows and currency markets in 2025.

​After peaking inflation in the US in 2021 and 2022, inflation decreased in 2023 to below 4% in the summer and steadily hovered between 3% and 4% until summer 2024. At the time, US inflation fell below 3% for the time in years and followed an optimistic trend to as low as 2.4%, before inflation started to pick up again October 2024. Since then, inflation steadily rose to 2.9% in December 2024. While the development overall is promising, the most recent trend is worrying, as interest rates remain at high levels.
To combat inflation, the Federal Reserve increased interest rates aggressively to as high as 5.25% - 5.5% until late 2023. Initially, cuts were expected by spring 2024. Eventually, the Federal Reserve started cutting interest rates aggressively in autumn 2024. By the end of 2024, US interest rates are between 4.25% and 4.5%. Originally, cuts in the same magnitudes were expected for 2025. These expectations were crushed by Powell in the Fed’s December meeting, in which he suggested that there will only be two 25bps rates cuts throughout 2025. With inflation expected to remain between 2% and 3%, the US labour market will mark an important decision maker for the Federal Reserve for their short-term interest rate policy. Additionally, Trump is another unknown, as he is a strong advocate for lowering rates sooner rather than later. However, while he can influence a lot, it is unlikely that his view will have an impact on the monetary policy, especially as it is virtually impossible for him to replace Powell as Chair of the Federal Reserve. Powell also proved in their meeting at the end of January 2025 that he is not swayed that easily, when the Fed decided to hold interest rates at current level. Figure 1 shows the development of inflation and interest rates in the US, the Euro zone, and the UK from 2023 to January 2025.

​US inflation has fallen significantly since 2023. At the end of 2023 and the beginning of 2024, US inflation hovered just above 3%, before falling to just below 3% for the remainder of 2024. In September 2024, inflation was on a promising trajectory before picking up in the remaining months. Under "normal" circumstances, inflation is expected to remain between 2% and 3% throughout 2025, with a tendency to fall to 2% by the end of the year. Although inflation has become a frequent topic of discussion, it is still important that it stays below 2% in order to stabilise the economy. Its importance has diminished, especially for the Federal Reserve, which has based most of its recent interest rate decisions on the US labour market. The Fed hiked rates aggressively in 2022 and 2023. Its rate rose to 5.25% - 5.5% by the end of 2023. Initially, markets expected rate cuts in early 2024 to gradually counteract the potential recession. The Fed did not cut rates until autumn 2024, citing the solid state of the economy due to a strong labour market. As soon as this market showed signs of weakness, the Fed began to cut rates aggressively, surprising market participants. However, in its latest cut to 4.25% - 4.5% in December 2024, Powell stated that the Fed would stop cutting aggressively in 2025. He outlined only two 25bp cuts in 2025, which would bring the federal funds rate to between 3.75% and 4% by the end of 2025. Prior to the meeting, expectations were for at least 1% cuts in 2025. Figure 1 shows these developments in more detail.