What factors are currently driving inflation and are they expected to persist into 2026?
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Executive summary
Inflation in late‑2025 is being driven by a mix of tariff‑related goods-price increases, shelter and medical‑care costs, and lingering services prices — headline CPI ran about 3.0% year‑over‑year in September 2025 and the PCE measure the Fed watches has been above 2% into 2025 (CPI 3.0%; PCE above 2%) [1] [2]. Forecasts and policymakers mostly expect inflation to drift down toward 2–3% in 2026 but differ on the path: some project a fade of tariff effects and a fall toward 2% by 2027 (Fed staff / FOMC outlook), while private forecasters see a persistent 2.8–3.2% range in 2026 if tariffs, fiscal impulses or weaker dollar effects hold [3] [4] [5] [6].
1. Tariffs and imported goods: the obvious recent accelerant
Policymakers and market commentators point to new import tariffs as a direct, measurable upstream source of higher goods prices that is unique to this cycle: Fed Chair Jerome Powell described remaining overshoots of inflation as “mostly” in goods categories directly affected by tariffs and said the tariff pass‑through should peak around Q1 2026 if no new rounds are added [7]. Private forecasters embed the tariff shock in their models and estimate it could add nearly a full percentage point to year‑over‑year inflation through mid‑2026 before fading — a key reason some houses keep 2026 CPI/PCE above 2% [5] [6].
2. Housing and medical care: the domestic, sticky components
By weight in the CPI basket, shelter and medical care together accounted for about two‑thirds of the 3.0% year‑over‑year CPI in the 12 months through September 2025; shelter’s large weight makes it a slow‑moving, persistent contributor to headline inflation [8] [9]. That stickiness contrasts with more volatile categories like gasoline, which have shown declines in some months [10].
3. Services and the labor market: cooling but watched closely
Federal Reserve speakers and data point to cooling services inflation and easing wage pressures; the Fed has argued services excluding tariff‑affected goods are in the low‑2% range — suggesting underlying domestic demand is less overheating than headline figures imply [7]. At the same time, the labor market shows mixed signals: some private indicators report slower hiring or rising layoffs while official claims and unemployment data have not uniformly confirmed a sharp deterioration, leaving uncertainty about wage‑driven services inflation [11] [12].
4. Monetary policy and the question of persistence
The Fed has recently moved to cut rates after a long restrictive stance, and FOMC participants project inflation generally declining through 2026 and toward 2% by 2027 in their baseline projections [4] [3]. Markets and some forecasters, however, put a higher probability on additional easing in early 2026 and warn that cuts, combined with tariff pass‑through and fiscal impulses, could sustain higher inflation into 2026 [2] [13] [5].
5. Forecasters split: a fading bump versus a prolonged plateau
Official and many central‑bank staff forecasts expect a downtrend in 2026 (Fed staff projection of a decline; FOMC minutes showing inflation declining in 2026) while several private firms (J.P. Morgan, Deloitte, KKR, Mercatus) model a scenario where tariffs, a weaker dollar and possible fiscal stimulus keep inflation nearer 2.8–3.2% through 2026 before easing [3] [5] [6] [14] [15]. The split hinges on assumptions about tariff permanence, pass‑through rates to consumer prices, and whether monetary easing will be offset by those forces [5] [6].
6. Data and nowcasts: watch the early months of 2026
Regional Fed nowcasts and models emphasize the value of high‑frequency indicators — oil, gasoline, and monthly CPI/PCE readings — to detect whether inflation momentum is fading or reaccelerating; analysts flagged that early‑quarter prints in 2025 were pivotal to assessing persistence and will be again in early 2026 [16] [12]. The delayed release of some official data in late‑2025 also increases near‑term uncertainty about trend strength [2].
7. Where the disagreement matters for policy and markets
If tariff pass‑through peaks and shelter/mortgage dynamics ease, inflation likely drifts toward central‑bank targets and allows further policy easing; if tariffs persist in passing through and fiscal/dollar forces support demand, inflation could remain stubbornly above 2% through 2026, forcing a more cautious Fed — a judgment that underlies divergent market and research‑house forecasts [7] [5] [6].
Limitations and unanswered questions: available sources do not mention precise quantified pass‑through rates for the current tariff rounds beyond scenario assumptions, and they do not provide a single consensus forecast for 2026 — projections vary by institution and hinge on future policy and tariff choices (not found in current reporting).