The US had nearly beaten back inflation, but tariffs are expected to revive it.

After soaring to 6.5% in 2022 (the highest since 1981), PCE inflation dropped to 3.8% in 2023 and 2.6% in 2024. It’s expected to average about 2.6% for 2025. But with businesses passing on more tariff costs to consumers, our US inflation forecast shows a rise to 2.7% in 2026. After that, weak gross domestic product growth should ease inflationary pressure.

Get our latest US Economic Outlook report.Tariff Impact on Consumer Prices and Inflation: What’s Next?

Core goods prices rose only about a percentage point cumulatively in 2025. But import prices (including tariff-related costs) were up nearly 10%. That means US businesses have been footing almost all the tariff bills. Why? It could be that their large stockpile of pretariff inventory allowed them to hold off on reflecting the cash cost of tariffs in their earnings reports. But that pretariff inventory is running out, and many businesses are planning further price hikes in 2026.

The Supreme Court will rule on the legality of President Donald Trump’s tariffs under the International Emergency Economic Powers Act.

The court outcome could alter our forecasts, depending on how the Trump administration responds. We already incorporate a 75% probability the IEEPA tariffs will be revoked, but we’re also assuming that the administration will replace much of the revoked IEEPA tariffs with other statutory authority.

We expect durables prices to rise a cumulative 4.5% over 2025-27 and nondurables to rise 5.6%. This is less than the runup in goods prices over 2021-23 (12% for durables, 10% for nondurables) but still a major inflationary impulse.

Consumption growth is forecast to ease to 1.9% in 2026 and to 1.8% in 2027. The main driver is the need to bolster household savings rates, along with slowing population growth. Afterward, we expect consumption growth to rebound slightly with the overall economy.

What Effect Will Tariffs Have on GDP Growth?

Through the third quarter of 2025, year-to-date real GDP growth was 2.1% year over year, a deceleration from the 2.8% average over 2022-24. Government spending has slowed. So has private fixed investment, as spending related to artificial intelligence has been offset by weakness in housing, commercial real estate, and other areas.

The negative effects of tariffs on GDP growth have yet to play out much, as the impact on consumption won’t be fully seen until consumer prices rise further. Additionally, if US businesses absorb more tariff costs, it will hurt their profits and thus hamper investment.

We anticipate GDP growth to bottom out in late 2026 or early 2027. Then it should improve starting in 2027 as the impact of tariffs fades and the economy responds to the Fed’s expected rate cuts.

Will Consumers Keep Saving?

Beyond the impact of tariffs, we expect consumers to pull back on spending in order to boost flagging savings rates. This will, in turn, slow economic growth.

The personal savings rate was 4.8% in the third quarter of 2025. This still significantly lags the 7.3% average in 2019, before the pandemic. Of that 2.5-percentage-point gap, we think about 1.5 percentage points is explained by higher household wealth from the rise in asset prices. But if those prices fall in 2026 or beyond, households could pull back on spending even more to rebuild savings.

Investors First: 2026 Market OutlookWhere Do Interest Rates Stand?

We expect private nonresidential fixed investment growth to slow to 0.9% in 2026 but then rebound in the following years. We had already expected a modest slowdown before the tariff shock, due to continued high interest rates. The Fed’s rate cuts in 2025 delivered some relief, though more is needed:

  • Federal-funds rate: Cut by 1.75 percentage points since September 2024. Yet longer-run interest rates have barely fallen.
  • 10-year Treasury yield: Stood at 4.2% in December 2025, having averaged 4.3% in 2025 and 4.2% in 2024.
  • 30-year mortgage rate: Down to 6.2% as of December but still well above prepandemic levels.

New homebuyers are putting up with exorbitant mortgage costs for now, but that won’t last forever. We think further rate cuts, to lower rates for homebuyers and other borrowers, will be needed to drive a recovery in investment spending.

So, What’s the Fed Likely to Do With Interest Rates?

The Fed is meeting Jan. 27-28. Here’s what we’re projecting:

  • Federal-funds rate: Expected to fall another 1.25 percentage points, with the target range hitting 2.25%-2.50% by the end of 2027.
  • 10-year Treasury yield: Projected to average 3.25% by 2028, as Fed cuts take effect, which is our long-run expectation.
  • 30-year mortgage rate: Forecast to decline from an average of 6.7% in 2024 and 6.6% in 2025 to 5.00% by 2028.

For the full details on tariffs, GDP, interest rates, and more, see our latest Economic Outlook report.

This article was compiled by Valentina Djeljosevic.