US Economics: Inflation Weekly—What inflation will the Fed care about?

Research evidence excerpt

US Economics: Inflation Weekly—What inflation will the Fed care about?

US Economics

22 June 2026 Citi Research

Kevin Warsh’s first meeting as Fed chair last week came at a time when the

narrative around inflation has shifted towards upside risks and the possibility of a

reaccelerating second wave of inflation, not unlike the late-1970s. These

arguments started with the rise in commodity and oil prices but have since

expanded to become more about consistently strong core PCE, pressures from AI-

demand, and a possible restrengthening in the labor market with strong job

growth.

Rather than reviewing new inflation developments, we use this Inflation Weekly to

take stock on the current inflation backdrop halfway through 2026, and how the

perception of risks may change over just the next few months. In our current

forecasts, core CPI falls below 2.5% as soon as August data while core PCE remains

stuck above 3%.

The debate around the appropriate way to judge inflation will become increasingly

in focus as Chair Warsh’s new task forces reassess the appropriate way to conduct

monetary policy:

The last task force, the one on inflation frameworks, will examine the drivers of

inflation, first principles, and weigh the full range of ideas for delivering price

stability in a changing economy.

Of course, higher interest rates slow inflation via cooling demand, and

understanding the sources of inflation should be critical to understanding the

appropriate policy response and its trade-offs.

Tariffs

Tariffs had been the main source of inflation risk in 2025, but recent data have

confirmed these risks are fading in 2026 as effective tariff rates have fallen. There

has been some stickiness still in apparel prices (although partly related to strong