December 26, 2025

The Expert Take

This year’s economy has been one big question mark — strong spending, a weird job market (that is, when the data is available), and fewer tariff shocks than expected. But what about next year? We asked Karen Dynan, a senior fellow at the Peterson Institute for International Economics, to help us figure out what’s really ahead for grocery prices, our paychecks, and economic growth in the new year.

Featured Expert

Karen Dynan

Nonresident Senior Fellow, Peterson Institute for International Economics

What’s the overall outlook for the US economy in 2026?

KD: It’s very hard to tell what’s in store. Economic performance was better in 2025 than people had feared, given the big increases in tariffs and other policy changes. It looks like AI optimism offset the headwinds from policy changes: Businesses were spending on AI-related equipment, and consumers were spending their AI-related stock market gains. Next year, a lot hinges on whether that optimism continues — if it does, then we’ll probably see more growth in the economy. But if, for example, investors become bearish and stock prices fall, the economy could stall out.

What’s the deal with inflation?

KD: Inflation is way down from where it was in the early 2020s, and that’s good. But it’s not back to 2%, which is where the Fed wants it. My guess is that inflation is going to go higher before it goes lower again because of the tariffs. So far, businesses have been able to absorb the tariffs, but that can’t go on forever, and eventually they will need to pass more of the cost on to consumers. 

What's one issue the public most underestimates ahead of 2026?

KD: The potential for the stock market to fall. I’m not predicting that it will, but people should recognize that the gains are based on predictions about the returns to AI and that there is huge uncertainty about how things will play out. How AI will affect firm profitability could turn out as predicted or even better, but it could turn out worse.

What should we keep an eye out for?

KD: Tariff policy is a big one. If we start to see more tariff-related inflation, that might make the Fed reluctant to cut interest rates further. Immigration policy is another big area. Immigrants are an important part of the labor force in sectors like agriculture, construction, and hospitality. Those industries could end up with labor shortages if the number of foreign-born workers drops further, and that could then raise wages — good [news] for the remaining workers in those areas, but it would also show up as higher inflation more broadly.

If you could give people one piece of financial advice, what would it be?

KD: Make sure you have enough savings to get through a rough patch. 2025 turned out to be a good year for the economy, but there’s a lot of uncertainty about prospects for 2026. 

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