By Savings UK Ltd

As 2025 unfolds, inflation remains one of the most closely watched economic indicators in the United States, the United Kingdom, and globally. After the sharp price surges of 2021–2022 and the volatile disinflationary path of 2023–2024, consumers, businesses, and policymakers are now navigating a more complex and uneven inflation landscape. While headline numbers have cooled from their pandemic-era peaks, stubborn pressures in certain sectors — especially housing and services — are keeping core inflation higher than many central banks would like.

This article explores the latest Consumer Price Index (CPI) data, core inflation trends, the behaviour of food and housing prices, and how the US Federal Reserve’s (Fed) policy stance may shape the rest of 2025.

Headline CPI: stabilisation but not victory

The headline CPI, which measures the overall change in prices for a basket of goods and services, has stabilised compared to the surging rates of a few years ago. In most advanced economies, headline inflation is now hovering between 2.5% and 3.5%, slightly above central bank targets.

Much of the drop from previous highs has been due to falling energy prices, a normalisation of global supply chains, and a more balanced goods market. Shipping costs, for example, have returned to near pre-pandemic levels, and commodity prices have eased from the extremes seen during geopolitical disruptions earlier in the decade.

However, headline CPI can be deceptive. Stripping out volatile food and energy components reveals a more persistent problem — core inflation.

Core inflation: the sticky middle

Core inflation, which excludes food and energy, is often viewed as a better gauge of underlying inflation pressures. In 2025, core inflation in the US has remained stubbornly close to 3%, despite aggressive rate hikes over the previous two years. The story is similar in the UK and parts of Europe, where services inflation is keeping the overall number elevated.

Two main drivers stand out:

1. Shelter costs – Housing affordability remains a major challenge. High mortgage rates have slowed home sales but not significantly reduced prices, while rental inflation continues due to limited housing supply.

2. Services demand – Spending on healthcare, education, travel, and hospitality has proven resilient. These sectors rely heavily on labour, and wage growth has kept upward pressure on prices.

Food prices: easing but uneven

Food inflation, one of the most politically sensitive components of CPI, has eased from double-digit gains in 2022–2023 but remains above historical norms. The pace of increases in grocery prices has slowed, thanks to improved harvests, lower fertiliser costs, and more stable global transport links.

That said, specific categories continue to see elevated costs. Meat and dairy prices, for example, remain high in some regions due to weather-related disruptions and persistent animal feed costs. In developing economies, currency weakness against the dollar has also kept food import prices elevated, even when global commodity prices have declined.

Housing costs: the stubborn pillar of inflation

Housing is the single largest component of CPI in the US and a significant driver in other advanced economies. In 2025, it remains the most stubborn contributor to overall inflation.

Several factors explain this persistence:

• Supply shortages – Years of underbuilding mean demand still outstrips supply in many cities.

• High financing costs – Elevated mortgage rates have discouraged sellers from moving, constraining supply further.

• Population growth and migration – Influxes into certain metropolitan areas have intensified local demand pressures.

Even as headline inflation falls, housing’s heavy weighting in CPI calculations ensures that elevated shelter costs keep the overall reading higher than central banks’ targets.

Fed policy: patience with a tightening bias

The US Federal Reserve has made clear that it will not declare victory over inflation prematurely. After raising interest rates aggressively from 2022 to 2024, the Fed entered 2025 with a “higher for longer” stance, keeping policy rates elevated to ensure inflationary pressures are fully contained.

In recent months, some policymakers have hinted at possible modest rate cuts later in the year, but only if core inflation shows a convincing downward trend. The Fed remains particularly concerned about wage growth feeding into services inflation, as this tends to be more persistent and harder to reverse once embedded.

The UK’s Bank of England and the European Central Bank face similar dilemmas — weighing the risk of slowing growth too much against the risk of loosening policy too soon.

Business and consumer impact

For businesses, elevated core inflation means ongoing cost pressures, especially in labour-intensive sectors. Companies have become more selective in passing these costs to consumers, aware that buyers are now more price-sensitive than during the immediate post-pandemic rebound.

For consumers, the picture is mixed. Lower energy and goods prices have brought some relief, but persistent housing, food, and services inflation means household budgets remain under strain. Wage growth has helped offset some of these pressures, but real income gains remain modest.

Inflation outlook for the rest of 2025

Looking ahead, three factors will be critical in determining whether inflation continues to cool or plateaus at current levels:

1. Housing market dynamics – Any policy or market shift that meaningfully increases housing supply could ease shelter inflation, but such changes take time.

2. Global commodity stability – Geopolitical risks remain a wild card; any renewed spike in energy or agricultural prices could push headline CPI higher again.

3. Labour market conditions – If wage growth remains strong, particularly in services, core inflation could stay sticky, prompting central banks to keep rates elevated.

Many economists expect headline inflation to move closer to central bank targets by late 2025, but core inflation may not fully align until well into 2026.

Recommendations from Savings UK Ltd

For investors, businesses, and households, adapting to this inflation environment means:

• For businesses – Continue building resilience into supply chains, explore productivity improvements to offset wage pressures, and maintain cautious pricing strategies.

• For households – Monitor fixed costs closely, particularly housing and utilities, and look for opportunities to lock in stable rates where possible.

• For investors – Consider assets that perform well in a “sticky inflation” environment, such as inflation-linked bonds (TIPS in the US), real estate, and certain commodities.

Conclusion: a slow path to normalisation

Inflation in 2025 is not the runaway problem it was a few years ago, but neither is it fully tamed. Headline CPI has improved, yet core inflation — especially in housing and services — remains a challenge for central banks.

The Federal Reserve and its global counterparts are likely to remain cautious, balancing the need to curb inflation with the risk of slowing growth too sharply. For consumers and businesses, the reality is that inflationary pressures, while less severe, will continue shaping decisions in spending, investment, and policy for the foreseeable future.