• UBS projects U.S. inflation will continue rising into the first half of 2026, with core PCE peaking around 3.2% in Q2 2026
  • Tariffs are cited as the primary driver, with inflation expected to remain above the Fed's 2% target until at least 2027
  • The bank advises caution on near-term data releases due to potential distortions and volatility

UBS has issued a stark warning that U.S. inflationary pressures are far from transitory, projecting that inflation will continue its ascent through the first half of 2026 before peaking. The Swiss banking giant points to tariffs as the dominant force driving this persistent price growth, complicating the Federal Reserve's path toward its 2% target.

The analysis shows headline inflation has already climbed 46-70 basis points since hitting post-pandemic lows in April, with core inflation rising 24-30 basis points over the same period. UBS economists expect another 30-40 basis points of increases before inflation reaches its zenith in the second quarter of 2026.

"The tariff impact is proving more persistent and broad-based than many market participants anticipated," said a senior UBS economist who asked not to be named discussing internal projections. "We're seeing these cost pressures work their way through multiple sectors of the economy."

The bank's modeling suggests core PCE inflation will reach approximately 3.2% at its peak next year, then gradually decline to 2.9% for full-year 2026 and 2.4% in 2027. This timeline pushes the Fed's 2% target firmly into 2028 territory, representing a significant setback for policymakers who had hoped to declare victory over inflation.

Traders are already adjusting their expectations for Federal Reserve policy. Interest rate futures now price in fewer cuts for 2026 than they did just a month ago, reflecting concerns that the central bank may need to maintain restrictive policy for longer. The Fed has already cut rates by 50 basis points this year, but further easing appears increasingly constrained.

UBS specifically cautioned clients against overreacting to near-term data prints, noting that November's Consumer Price Index report due next week could show distortions that don't reflect the underlying trend. The bank's research team emphasized that the structural drivers of inflation, particularly trade policy, warrant more attention than monthly volatility.

Efforts to reach UBS for additional comment on the timing of their projections were unsuccessful. A spokesperson for the Federal Reserve declined to comment on analyses from private sector banks.

The persistent inflation outlook has implications across asset classes. UBS has been recommending clients increase exposure to commodities and certain equity sectors, particularly technology and AI-driven companies that demonstrate pricing power. International diversification has also featured prominently in their advice, capitalizing on relative dollar weakness.

Market participants will be watching closely for any policy responses from the administration regarding tariff adjustments, though people familiar with the matter suggest no major changes are imminent. The entanglement of trade policy with monetary policy continues to create complex challenges for economic forecasters and policymakers alike.

Correction: An earlier version of this article misstated the projected core PCE inflation rate for 2027. It is 2.4%, not 2.5%.