Inflation may have cooled in recent months, but households in Rhode Island and beyond continue to feel the aftereffects.
Thomas Tzitzouris, head of fixed income research at New York City-based Strategas Research Partners, told business leaders at Providence Business News’ Economic Trends Summit on Jan. 30 that inflation has consistently outpaced wages and created cost pressures that are still strangling households, which have lost 4.5% of purchasing power since 2020.
To keep up, those households have been leaning on credit.
And the U.S. government has put itself in a similar position, Tzitzouris said during his keynote address. If current trends continue, interest paid on the national debt will soon outpace defense spending.
“And neither of these are discretionary,” Tzitzouris said. “You don’t have a choice. You have to spend on defense. And you have to spend on debt. So something else has to get cut.”
While many Americans may think the worst of the supply chain, pricing and labor shocks of the previous three years is behind them, the truth is more complicated, according to Tzitzouris.
There has been a truism among economists that has held 90% of the time over the past 200 years, he said.
“When you see a first wave of inflation of the magnitude that we saw, a second wave comes within 18 to 24 months,” he said, calling the labor supply shock akin to the energy crisis in the 1980s.
“Supply shocks are not transitory,” he said. “These are sticky.”
Overall, inflation is likely to come in just under 2.5% in 2025, drifting lower around March before going “sideways” for much of the rest of the year, Tzitzouris predicted.
On the bright side, the U.S. economy should avoid a recession this year, and there should be notable growth in both the small-business and manufacturing sectors, he said.
But the absence of any fiscal stimulus other than tax cuts will cause credit card debt to weigh heavier on low- and middle-income households. And if inflation remains elevated, higher-income households may also get squeezed.
The biggest risk identified by Tzitzouris is the possibility of rising interest rates, which would put a damper on any gains ushered in by a Trump administration that is perceived as friendly to cutting taxes and regulations.
But this could be counteracted if households pull back on nondiscretionary spending, a possibility given that the overall consumer is “exhausted” and “looking to take a break,” he said.
Tzitzouris forecast that with deficits still constituting between 7% and 8% of gross domestic product, the national deficit will exceed $1 trillion in 2026. And the Federal Reserve is likely to cut interest rates by 50 basis points by the end of the year, with the first cut in June and another in September or December.
As for Rhode Island, the state’s low labor force participation rate, high housing costs and low birth rates will continue to blunt economic growth.
Citing the “skills mismatch,” Tzitzouris presented data showing that the state doesn’t offer the labor force skilled enough to fill needed positions in emerging industries. Baby boomers have retired, Generation X is too small a population, and Generation Z is largely untrained, said Tzitzouris, who also predicted the new year could bring unprecedented stress on Rhode Island municipal governments.
But the state can at least say it is still outperforming other New England states such as Connecticut, spending less on government employees per capita.
“It may look like Rhode Island has gotten better,” he said. “But it’s really that our neighbors have gotten worse.”
