UBS Economics-US Economic Perspectives _US Inflation Monthly Still some w...-117803044

ab17 September 2025Global ResearchUS Economic PerspectivesUS Inflation Monthly: Still some way to goInflation grinding upwards; More pass-through of the tariffs to come
Inflation continues to edge upwards from the post-pandemic lows in April, and the inflation news over the past month has largely followed our expectations. However, core PCE prices in August look to be notably softer (+22bp) than the core CPI increase (+35bp) and below what we had been expecting prior to the CPI.
Increased tariffs have led customs revenue to rise from 40bp of nominal PCE in February up to 169bp in August. Despite monthly core CPI increases having risen we estimate that only around 21bp of this 129bp increase in costs has passed through to consumer prices. Our estimates are on the lower range of the various estimates that we survey, though all estimates suggest there is still substantial pass-through to consumer prices remaining.Price changes projected to stay elevated in coming months
We currently project that core CPI increases will average 33bp over the remaining four months of the year with the September increase projected to be a bit on the lower side of that average (+29bp). The headline CPI is projected to increase much more strongly (+37bp seasonally-adjusted, +33bp NSA) than the core in September as a result of a strong gasoline price increase.
The strong Adobe Digital Price Index in August suggests some upside risk that core non-transportation goods prices will accelerate sharply in coming months.
There is considerable uncertainty surrounding our inflation projection, particularly the timing of tariff pass-through. The forecast will be revisited as new information and new policies warrant. A detailed forecast spreadsheet is available on our website.Core PCE inflation above consensus: 3.2% in 2025, 3.1% in 2026, 2.4% in 2027
We expect tariff effects will push core PCE inflation up from its current level of 2.9% through July to 3.2% in the fourth quarter of this year. We project that inflation will peak in the second quarter of next year with core CPE price inflation around 3.6%. Given current tariffs, we anticipate inflation should be declining in the second half of next year but it is likely to stay quite elevated through late 2026 and we expect it will still be above the FOMC's 2.0% inflation target in 2027.
This month we have revised down our core PCE price inflation projection for 2025 from 3.4% to 3.2% on the weaker-than-expected incoming PCE price data. The core CPI projection is unchanged as the CPI data was roughly in line with expectations. As a result of these changes, our core PCE price inflation projection is barely above consensus this year. In contrast, our CPI projection this year, along with all the projections for 2026 and 2027, remain solidly above current consensus inflation projections as we continue to expect second-round effects of the tariffs. Our forecast is in line with CPI swaps fixings through the end of the year and above swaps