TD Securities expects US PCE inflation to firm in December, forecasting core PCE at 0.25% month on month and headline PCE at 0.27%. These moves are expected to translate to 2.9% year on year for core PCE and 2.8% for headline PCE.
The firm expects supercore PCE to be 0.26% month on month, with food prices contributing to the stronger headline reading. It also notes that January CPI did not rise as much as expected, especially in services, and that some CPI strength is not expected to feed through into its PCE forecast.
Tariffs And Near Term Inflation
Higher tariffs are expected to push consumer prices up in the near term. TD Securities forecasts core CPI inflation to peak at around 2.8% year on year in Q2 2026, with similar levels expected for core PCE.
It expects inflation to remain sticky in the first half of 2026, then ease through gradual disinflation in the second half of 2026. The article was produced using an AI tool and reviewed by an editor, and was published by the FXStreet Insights Team.
The inflation outlook for the first half of the year appears stickier than many anticipated. We saw evidence of this with the firm Personal Consumption Expenditures (PCE) data for December 2025 and a January CPI report that, while not as hot as feared, still points to persistent price pressures. This challenges the narrative that the Federal Reserve can begin easing policy soon.
Significantly higher tariffs, a result of new trade policies being implemented this quarter, are now a key factor expected to boost consumer prices. This leads us to believe that core inflation measures will likely move higher and peak sometime in the second quarter. We are now projecting core CPI to reach a cycle high of around 2.8% year-over-year by late spring.
Market Implications For Rates
Given this, we should consider adjusting interest rate positions to reflect a more patient Fed. The market is beginning to price out the possibility of a rate cut in the first half of 2026, a notable shift from just a few weeks ago. According to the CME’s FedWatch Tool, odds for a rate cut by June have now fallen below 25%, down from over 50% at the start of the year.
This mismatch between a hawkish Fed and hopes for disinflation creates an environment for increased market volatility. The uncertainty surrounding the true impact of tariffs and the stickiness of services inflation suggests that owning options could be beneficial. We are looking at positions like VIX call options or straddles on major indices to hedge against a potential market downturn.
This situation is reminiscent of the market environment we experienced back in 2022, when initial signs of cooling inflation were repeatedly met with hotter-than-expected reports. That period showed us that the final leg of the disinflation journey is often the most difficult. The Fed was forced to remain aggressive then, and we see a similar risk of the market getting ahead of itself today.
