4 Reasons to Think US Inflation Will Come Back Down

US inflation has been on the rise in 2026, but we’re calling for it to resume its fall over the next few years.

After the pandemic-era shocks drove US inflation up to a peak of 6.5% in 2022 (in terms of the Personal Consumption Expenditures Price Index, or the PCE Index), inflation began going down. By 2024, it dropped back to 2.6%. But progress halted last year, owing to the tariff shock, which contributed around 0.3 percentage points to inflation in 2025. Inflation started rising again this year, mainly because of the Iran war.

We expect inflation to drop to 2.4% in 2027 and an average of 2.0% over 2028-30, according to our latest forecast. That decrease will be a key factor for the Federal Reserve to resume cutting interest rates, after raising them on Sept. 16.

Here Are 4 Reasons Why We’re Optimistic About Inflation Falling

1) Tariff Impact Will Fade

Tariff hikes in 2025 drove up goods inflation, and tariff-related price increases have continued to trickle in this year. Inflation in core goods (that is, goods excluding food and energy) was 0.9% in 2025 and is tracking at 1.6% in 2026. The historical average (2005-19) for core goods inflation is about 0%. The current excess is not entirely tariff-related (for instance, a quirk in how software inflation is measured is artificially boosting durables inflation), but the greater part is.

The average tariff rate has held nearly flat since the Supreme Court struck down a part of the tariffs back in February 2026. It doesn’t look like large new tariff hikes are coming. So, once the tariff impact from the 2025 hikes fully plays out, we should see durables and core nondurables inflation recede much closer to historical norms.

2) Energy Price Spike Should Reverse

Oil prices are surging higher again as the June US-Iran ceasefire failed to result in a reopening of the Strait of Hormuz, and fighting restarted in August. West Texas Intermediate oil prices were $102 per barrel as of Sept. 14, up over 70% for the year to date.

But markets continue to expect prices to recede heavily over the next year and beyond. Futures prices for October 2027 stand at $72 per barrel. If that plays out, then prices at the pump will fall drastically over the next year, providing a deflationary impulse next year just as it provided an inflationary one this year.

Admittedly, the futures market could be wrong. The market underestimated the duration of the conflict at the outset. Back in March, short-term prices spiked above $100 per barrel, but October 2026 futures were trading below $80 per barrel, implying the war would’ve been long resolved by now. Now October 2026 is trading above $100.

But our experience has been that short-term commodities markets are hard to out-forecast. And the futures market view seems quite plausible. The disruption from the US-Iran war is mostly not permanent. At some point, the strait will reopen, and infrastructure will be repaired. Flows will resume. That will start the convergence of oil prices back to near-prewar levels. By contrast, permanent price shocks require permanent sources (such as the awakening of OPEC’s market power in the 1970s).

3) Wage Growth Is Now Consistent With Low Inflation

The labor market is no longer a force for inflation. Wage growth is running at a rate consistent with 2% inflation or even lower.

Our composite measure of wage growth stood at 3.5% year over year as of the second quarter of 2026, down markedly from the peak of 6.2% year over year in the first quarter of 2022. By subtracting productivity growth from nominal wage growth, we get the implied inflation rate (assuming a constant labor share of gross domestic product). Plugging in the average productivity growth of 1.9% in the past six years, that means current wage growth is consistent with inflation at 1.6%.

Weak wage growth should help to pull inflation down across the economy, but especially in core services excluding housing (for instance, healthcare or restaurants).

4) Housing Inflation Should Continue Its Downward Trend

The housing component of the main price indexes (CPI and PCE), representing the average rent paid by all tenants, responds with a substantial lag with respect to the market rate. Because of this lag and the runup in market rents over 2021-22, official housing inflation was still high in 2024 at 5.40%. It decelerated to an average of 3.90% in 2025, and we expect it to drop further to 3.2% in 2026 and 3.0% in 2027. Market rent growth has decelerated sharply in response to falling housing demand and expanded supply, standing at merely 1% year over year as of July 2026, by our composite measure.