The Fed's preferred inflation gauge just reversed course. Core PCE climbed to 3.1% in the latest data, the highest reading since mid-2024, wiping out much of the progress made since the index peaked in March 2024. November and December were revised up too, meaning the trend was worse than anyone thought. Headline PCE came in at 2.8% year-over-year with a hot 0.4% monthly core reading. Meanwhile, the February CPI report from earlier this week showed 2.4% annual inflation, with food up 0.4% in a single month and shelter still running 3.0% above last year. All of this lands against a backdrop of oil above $100/barrel from the Iran war, gas up 60+ cents in two weeks, and an S&P 500 headed for its third straight losing week.
1. The Worst Is Over By Summer (Goldman Sachs, JP Morgan)
Today's numbers look scary, but tariff effects peak mid-year and then the math starts working in our favor.
Goldman Sachs forecasts core PCE falling from its current level to 2.2% by December 2026. Their argument: the tariff impulse peaks mid-year, and then favorable base effects — high readings from 2025 dropping out of year-over-year comparisons — pull the number down mechanically. Strip out tariff-affected goods and core inflation is already around 2.3%, close to the Fed's target.
JP Morgan's model tells a similar story with a sharper near-term spike. They expect CPI to hit 3.6% by June as tariff pass-through peaks, then fall to 2.2% by Q4 as the shock fades. The key assumption: businesses phase tariff costs through over roughly six months, and once that's done, the inflationary impulse stops.
Fed Vice Chair Philip Jefferson sees the services disinflation trend holding. In February he noted that non-housing core services inflation had fallen to 2.7% year-over-year from 4.1% a year earlier — a significant improvement in the stickiest category. If services keep cooling, the tariff bump is a temporary detour rather than a trend reversal.
2. The Genie's Out of the Bottle (Larry Summers, PIIE, Jason Furman)
This isn't a speed bump — it's a policy-driven inflation spiral that the Fed is too loose to contain.
Larry Summers says inflation, not unemployment, is "the biggest risk for US economy." He has warned that Trump's policies could drive "substantially greater inflation than what was set off by the excessive Biden stimulus" and that the Fed is on the "loose side." His sharpest line: "The inflation genie may not be back in the bottle." He also flagged deportation policy as an inflationary force through labor shortages.
The Peterson Institute projects inflation rising above 4% by end of 2026. PIIE calls this "arguably the most likely scenario," driven by lagged tariff effects, fiscal deficit expansion above 7% of GDP, tighter labor markets from immigration restrictions, and rising inflation expectations. That's not a temporary blip — it's five structural forces compounding simultaneously.
Jason Furman points to tariffs at "century-high levels" as the core problem. With rates at 125% on Chinese goods, the tariffs have "subtracted from growth" and "added meaningful inflation," showing up in furniture and electronics prices. Paul Krugman estimates tariffs have already added 0.8 percentage points to inflation. Businesses absorbed most of the cost in 2025, but Goldman estimates pass-through has already risen to 55% and could hit 70% by year-end.
3. Welcome to Stagflation (Yardeni Research, Morgan Stanley)
Weak growth plus hot inflation plus an oil shock — this is the 1970s playbook, and the Fed has no good moves.
Yardeni Research warns of a "1970s Redux" — a dual mandate contradiction that leaves the Fed paralyzed. The numbers tell the story: 1.4% GDP growth, 3.1% core PCE, oil above $100, payrolls down 92,000 jobs in February, unemployment at 4.4%. Weak growth calls for rate cuts. Hot inflation demands holding rates. The Fed can't do both.
Morgan Stanley's analysis shows the Iran war oil shock compounding every other inflationary pressure. Higher energy prices don't just raise gas bills — they damage stocks, real estate, and credit markets simultaneously. Gas has jumped 17% since the February 28 strikes, and the Strait of Hormuz disruption has put a significant share of global oil transit at risk. This is a supply shock layered on top of a tariff shock layered on top of sticky services inflation.
The Fed's own projections look increasingly optimistic. Powell said at the January FOMC that tariff effects would peak then decline, describing them as a "one-time price increase." But that assumed no new shocks. The Iran war, which started after that meeting, has introduced exactly the kind of external force that turns "one-time" inflation into something stickier. Markets have already repriced: consensus shifted from 3-4 rate cuts in 2026 to just 1-2, with the first not expected until June.
Where This Lands
The optimistic case — Goldman and JP Morgan's forecast that inflation falls below 2.5% by year-end — requires tariffs to stay flat, oil to come back down, and no new shocks. But this year has already delivered a war in Iran and a near-closure of the Strait of Hormuz. On the other hand, Summers and PIIE's structural alarm depends on pass-through rates and inflation expectations that haven't fully materialized yet. What we do know is that 53% of Americans are actively budgeting for 2026, up from 46% last year, and the average household is absorbing about $1,500/year in tariff costs alone. Where this lands depends on whether today's 3.1% is the peak or the new floor.