US Economics Weekly: Tariff pass-through is fading, oil spillovers remain narrow

Research evidence excerpt

US Economics Weekly: Tariff pass-through is fading, oil spillovers remain narrow

IdeaM

Fading tariff pass-through, narrow oil spillovers

This week we published our mid‑year outlook, with a baseline of gradual geopolitical

de‑escalation, a temporary energy‑driven bump in headline inflation, and a patient

Fed. We expect US growth to remain close to trend, with real GDP expanding 2.3% in

2026 and 2.6% in 2027. A modest drag from higher energy prices caps real consumption

growth at 1.8% in 2026, with disproportionate pressure on lower‑ and middle‑income

households. Business investment remains a key offset, with AI‑driven capex providing

structural support and lifting nonresidential investment growth to 7–8%, with hyperscaler

spending exceeding $1tr by 2027.

The labor market maintains its “curious balance,” with payroll gains of 50–60k per month

sufficient to keep unemployment contained, drifting down to 4.1% by 2027 even as AI

adoption adds some upward pressure. On the inflation front, we expect a near‑term peak

tied to the energy shock, followed by gradual disinflation, with core PCE easing to 2.8–

2.9% (4Q/4Q) in 2026 and 2.3% in 2027, albeit with risks skewed toward persistence.

The bar for monetary easing has risen, and we expect the Fed to remain on hold

through 2026 before beginning a gradual normalization cycle in 2027, with 25bp cuts

in March and June bringing the terminal range to 3.0–3.25%.

Key assumptions underpinning our core inflation outlook are that tariff passthrough

will fade over the coming months and that oil spillovers into core will remain limited.

This week’s CPI inflation data were broadly consistent with those assumptions.

Tariff passthrough continued but decelerated in April, with goods more exposed to tariffs