Lower inflation opens the door for larger 2025 IT budgets

CIOs are heading into the 2025 budget season, and all eyes are on how budgets will change and where spending will go. Let’s unpack the details and indicators that are driving the decisions. Here are a few observations.

Inflation continues to drop

Companies have largely looked at inflation and interest rates to provide guidance. Today, the US Department of Labor announced the latest Consumer Price Index (CPI) numbers which point to inflation dropping below 3% for the first time since 2021.

The continued decline in inflation should set up the Federal Reserve to cut interest rates by 25-50 basis points at their meeting next month.

The combination of inflation continuing a downward trajectory and cuts in rates eases the fiscal constraint that many CFOs and CIOs have felt over the past 18 months.

2025 budgets going up…but by how much?

Looking back, 2023 and 2024 saw relatively flat IT budgets. Some categories went up, others went down. At the same time, demand for spending on innovation sat on the sidelines awaiting resources.

Heading into 2025, it appears the climate is changing as fiscal pressures weaken. There are still questions about sector influences, but largely, fiscal spending is ready to pop.

For CIOs, this means an increase to their 2025 budget to levels resembling 2022. While the overall spending will increase, the makeup of categories of spend will change from past years.

Focus on innovation and efficiency

The 2025 budget requires a CIO to maintain strong fiscal policy and attention to financial operations (FinOps). Spending increases for 2025 will not be spread evenly across categories.

Efforts directly tied to innovation and efficiency will garner the greatest gains.

Efficiency gains will not come at the expense of shedding headcount. Quite the contrary. Expect spending in efficiency to make staff more effective and raise the value of the jobs they already hold. In other cases, staff will move to more valuable roles.

AI (and generative AI) will play a role in efficiency gains, but not in the way many may think. Historically, efficiency gains as a key contributor to ROI has come under high scrutiny by CIOs as claimed gains are rarely achieved. Instead, this time efficiency will come in the form of doing things not previously possible.

That leads to the second area of spending increase around innovation. New and mature solutions have opened the door to new capabilities for enterprises. The challenge is freeing up the resources (people and money) to switch to the new processes and technology.

From the CIO perspective

CIOs have largely been sitting on the sidelines over 2023 and 2024 streamlining their organizations and fiscal spending to align with the economic climate the past two years. As fiscal policy starts to ease, new spending in both efficiency and innovation categories will gain momentum.

Spending in 2025 will tie more directly with business outcomes to support and catapult the business coming out of the economic pressures of the past 18 months. Projects with long lead-times to ROI and those requiring too many dots to connect to key business outcomes will struggle to gain attention.