Inflation Outlook 2026

Headline CPI is running 3.3 percent year-over-year, core CPI 2.6 percent, headline PCE 2.8 percent, and core PCE 2.8 percent (March 2026 prints). The 5Y breakeven is 2.58 percent, the 10Y breakeven 2.40 percent, and the 5Y5Y forward breakeven 2.30 percent. Michigan year-ahead inflation expectations sit at 4.7 percent, the highest reading since 1981, while market-priced expectations remain anchored close to the Fed's target. That is a 2.3 percentage point gap between household expectations and Treasury market pricing.

The composition tells the story. Goods inflation has stabilized near zero. Energy has reaccelerated with WTI in the $95-103 range driven by the Iran war risk premium. Shelter (35 percent of core CPI) has decelerated to 3.4 percent, close to but not yet at the long-run 2.5-3.0 percent normal. Services ex-housing ("supercore"), the Fed's preferred read, sits near 4.0 percent year-over-year and has been the stickiest component all cycle. Wage growth at 4.1 percent on average hourly earnings continues to feed it.

The setup is mid-cycle disinflation that has stalled. Headline inflation is half the 9.1 percent June 2022 peak but has not advanced meaningfully toward 2 percent in roughly a year. The Fed is holding policy at 3.50-3.75 percent precisely because supercore is not yet compatible with the target. Each monthly print is a referendum on whether the stall breaks lower (cuts) or higher (no cuts, or hikes return to the conversation).

The first force is energy passthrough. WTI at $95-103 (versus $73 pre-Iran in early 2025) adds approximately 50bp to headline CPI and 20-30bp to core through second-round transport and chemical-input effects. Gasoline pump prices feed into Michigan expectations within weeks. Each $10/bbl sustained move is roughly 0.3-0.5pp of headline CPI on a 6-12 month transmission lag. The Iran war is the single largest acute upside risk to the inflation path.

The second force is the tariff regime. The 2025 Trump tariff package is being phased through and adds an estimated 0.7pp to headline CPI on full pass-through, distributed across goods categories with higher weight in apparel, electronics, and household equipment. Tariffs are a one-time level shift in prices, not a sustained inflation rate, but the level shift takes 6-18 months to fully complete and complicates the disinflation narrative inside that window.

The third force is wage-price feedback in services. Average hourly earnings at 4.1 percent year-over-year above productivity growth of roughly 2 percent leaves unit labor costs running 2 percent positive. That is consistent with services inflation in the 3.5-4.5 percent range, exactly where supercore sits. Until the labor market loosens enough to bring wage growth toward 3 percent, services inflation will not return to a path consistent with a 2 percent overall target. The JOLTS quits rate at 2.0 percent (down from 3.0 percent peak) is the leading indicator of wage moderation; further softening here is what bulls are watching.

The sticky-inflation analog is 1979-1982. Headline CPI peaked at 14.8 percent in March 1980, fell to 7.5 percent by mid-1981 on Volcker's first round of tightening, then re-accelerated as energy reasserted before finally breaking lower in 1982. The lesson, repeatedly cited by Fed staff in 2023-2025, is that inflation does not decline in a straight line; intermediate stalls and re-accelerations are the rule, and central banks that ease too soon import a second wave. Today's setup is far less severe (3.3 percent versus 14.8 percent peak), but the structural similarity, sticky services driven by labor-cost dynamics, plus an exogenous energy shock, is real. Volcker's hold-then-cut sequence in 1982-83 is the playbook the current Fed is implicitly following.

The recent template is the 2021-2024 inflation episode itself. CPI ran from 1.4 percent in January 2021 to 9.1 percent in June 2022 on three overlapping drivers: pandemic supply shocks, fiscal stimulus ($5 trillion+), and energy reset. The Fed lifted policy 525bp in 18 months, the most aggressive cycle since Volcker. Headline CPI fell from 9.1 percent to 3.0 percent by mid-2023, a 600bp decline, then stalled in the 3.0-3.5 percent range through 2024 and into early 2026. The clean disinflation phase ended once the energy and goods cyclical reversed; the residual was services, and services has not budged. April 2026 is essentially the same setup as April 2024, with one new variable (Iran energy premium) layered on top.

The bull case is a labor-led normalization. Probability roughly 35 percent. The path: unemployment drifts to 4.6-4.8 percent through Q3 2026, JOLTS quits rate falls below 2.0 percent, average hourly earnings decelerate to 3.2 percent, supercore CPI falls below 3.5 percent by year-end. Headline CPI averages 2.8 percent in H2 2026, the Fed delivers 75-125bp of cuts, and 10Y nominal yields fall toward 3.75 percent. Real yields fall, multiples expand, gold continues to hold value. Iran de-escalation removes the energy upside. This is the soft-landing scenario the consensus has been pricing.

The bear case is a re-acceleration. Probability roughly 25 percent. The path: WTI sustained above $110 on Iran/Saudi escalation adds another 50bp to headline; the second wave of tariffs lands in the index over Q3 2026; wage growth re-accelerates as unemployment fails to rise; Michigan year-ahead expectations 4.7 percent leak into wage demands and corporate pricing power. Headline CPI returns to 4.0-4.5 percent by year-end. The Fed cannot cut; the conversation shifts back to whether the next move is up. 10Y yields breach 5.00 percent, equities compress, gold reprices higher, and the dollar strengthens versus EM. The 1980 analog of a second-wave is the cautionary template.

First, the monthly CPI release (typically the second Tuesday). Watch supercore CPI (services ex-housing) more than the headline; the Fed does. Second, monthly PCE release at end-of-month; core PCE is the actual target. Third, average hourly earnings (first Friday) and the Employment Cost Index (quarterly), the wage-pressure leading indicators. Fourth, the JOLTS quits rate (second Tuesday of each month, one-month lag). Currently 2.0 percent; a fall toward 1.8 percent is a clear wage-deceleration signal. Fifth, breakevens at 5Y, 10Y, and 5Y5Y. The 5Y5Y at 2.30 percent is the cleanest gauge of long-run anchoring; a sustained move above 2.50 percent is de-anchoring. Sixth, Michigan expectations (preliminary mid-month, final end-of-month). Seventh, WTI and the Brent-WTI spread for Iran-related supply risk. Eighth, tariff implementation calendar and the apparel/electronics CPI sub-categories where tariff pass-through shows up first.