July 21, 2025

Hi everyone, my name is Taylor St. Germain with ITR Economics and welcome to this edition of TrendsTalk. We at ITR are your apolitical and unbiased source of economic intelligence and today I wanted to discuss inflation and interest rates. I wanted to give you all a brief update on how we’re thinking about inflation and interest rates, not just now, but in the longer term.

There’s really two areas of inflation that I wanted to address. The first is the US Consumer Price Index, that’s the CPI, and the second will be the PPI, the US Producer Price Index. When we look at the US Consumer Price Index, that CPI again, where the Fed’s focus is much more, we have continued to see inflation slow. However, we’re still seeing the CPI elevated at a level of about 2.7% on the annual growth rate. Despite the continued slowing, it’s very likely the Fed was hoping to see more slowing in that CPI so that they’d be comfortable moving forward with interest rate cuts as we move to the second half of the year.

Now the Fed will be meeting this month and there is a very split, really two groups, some suggesting the Fed’s going to hold rates, the other suggesting we could get a quarter point cut. When ITR evaluates where inflation is today and what it means for interest rates in the future, it’s very unlikely that we’re going to get anything meaningful in terms of interest rate relief this year. We are seeing inflation remaining more persistent. Now I’m not ruling out the potential for an interest rate cut in the second half of the year, but from where the data is today, it seems quite unlikely that that’s going to happen.

When we look at the CPI in the longer term, we have the CPI forecasted to move up to 4.1% in 2026. That means it’s very unlikely in 2026 we’re going to see any interest rate cuts. If anything, we’d expect interest rates to generally rise. And our thought process here at ITR is that this inflation is going to be a lot more challenging over the course of the next five years. We are preparing our clients for what we see as higher inflation really from 2026 all the way through the end of 2029.

2025, folks, is likely the best interest rate you’re going to see for quite some time. So take advantage of that, whether it’s from a business perspective or a personal perspective. If you’re looking to buy a home, I’d say really target the next 12 months or so before interest rates rise and mortgage rates rise further. If you’re a business looking at borrowing or taking on a line of credit, the sooner the better if interest rates are what you’re really concerned with.

Now, we can get into some of the drivers. I won’t get into all of them here today, but we’re expecting higher labor costs over the next five years. We’re expecting to see an increase in material costs as a result of tariffs and nationalism, onshoring and reshoring, despite that being a good thing, does have an inflation element to it. And then we’re seeing costs like electricity continue to rise. We’re continuing to see our fiscal policies be one where the government’s increasing their level of spending, which drives inflation as well. For all of us here at ITR, we see inflation becoming more problematic, at least in terms of seeing higher interest rates as we navigate these next five years.

The producer price index is up about 1.4% compared to the year ago level. Now, a lot of folks would have anticipated that number actually being higher, especially as a result of tariffs. That’s coming. What we’ve really seen so far this year is a lot of businesses pulled in imports, increased their material purchases in the first quarter of the year to try to get ahead of tariffs. But we’re very quickly moving through that tariff inventory. And as we move later into the year, it’s very likely we’re going to see inventory levels being replenished by materials, by inventories that are going to be subject to tariffs. And that is going to drive some of that producer price index higher. So even though we’re only at 1.4% today, we expect that PPI to be at 2.6% by the end of the year.

We as businesses need to have a plan in place for contending with these higher costs. Whether we’re talking about the CPI, whether we’re talking about the PPI, the message is the same, which is over the next few years, we’re expecting higher levels of inflation. I want to highlight there’s still a lot of growth out there in our forecast. We have GDP soaring to record highs over the next few years. The industrial economy is now growing at an accelerating pace. Higher inflation doesn’t mean that we won’t grow, but it means that while we’re growing, we’re going to face higher costs. And there’s a lot of implications on what that means for margins, and that’s really where we need to focus today. How do we plan price increases? How do we drive productivity so we can maintain these healthy margins during what we see as a second half of this decade characterized by growth, but again, that growth coming along with a higher cost. That to me is the big challenge for businesses over the next five years.

Please head over to Fed Watch to hear more about the Fed and interest rates and inflation from our Chief Economist, Brian. He’s always updating you all on a week-to-week basis. And I would encourage you, especially as these Fed meetings are coming up to head over there and listen to what he has to say.

Thanks so much for joining me today on this episode of TrendsTalk. Please like and subscribe to TrendsTalk wherever you listen to your podcasts.  And I look forward to seeing you all in the next one. Thanks so much. Take care.