The risk of higher US inflation in 2026

The consensus view among forecasters is that inflation will continue its gradual descent toward the Federal Reserve's 2 percent target through 2026. Similarly, market pricing suggests investors believe the Fed has largely won its inflation battle.
In our view, however, this optimism is premature. We think it is more likely that inflation will surprise to the upside—potentially exceeding 4 percent by the end of 2026. The core drivers are the lagged effects of tariffs, an expansion in the fiscal deficit (which could exceed 7 percent of GDP this year), a tighter labor market reflecting the…