US inflation and macroeconomic outlook: UBS expects US headline inflation to fall sharply in 2027, while core PCE returns to target only near end-2028

Overview

UBS's chartbook assesses US inflation and the broader economic outlook. Its central view is for uneven disinflation: headline measures should improve substantially as energy effects fade, but core inflation should decline only gradually because several supply- and demand-side pressures remain active.

Core views

Inflation has eased from its May peaks but, in UBS's view, is unlikely to slow much further in the next several months. Headline CPI peaked at 4.25% in May and fell to 3.40% in August; core CPI peaked at 2.85% and core PCE at 3.46%. Core CPI is at 2.4%, only about 0.15 percentage point above a target-consistent pace, whereas core PCE remains notably higher. The unusual core CPI–core PCE gap was -0.87 percentage point through July, versus a full-sample average of +0.47 percentage point. UBS estimates that the September 30 PCE methodology revision will lower current core PCE inflation by around 0.25 percentage point, while slightly raising measured inflation in 2022-24; it does not expect a major net change in the future inflation path. UBS expects headline inflation to fall sharply in spring 2027 if crude prices do not move materially above their March-April USD115-120 per barrel peak range. On current oil futures, it projects headline PCE inflation at around 2.1%-2.2% in May 2027 and near the FOMC's 2% target around September or October 2027. Core inflation should slow more gradually and unevenly as tariff effects fade, oil follows futures lower, AI-related inflation impulses turn negative as productivity rises, and rent increases decelerate. UBS forecasts core PCE at about 2.5% in 2027 and essentially 2.0% by end-2028; its 2026 forecast incorporating methodology revisions is 0.25 percentage point below consensus. The principal inflation risks are energy and supply stress. UBS's baseline assumes the Brent futures curve retraces much of the oil increase, but it sees upside risk if oil stays elevated. Its rule of thumb is that a permanent USD10/barrel Brent increase raises the headline CPI price level by roughly 0.40 percentage point: 0.25-0.30 percentage point appears within a few months through gasoline and energy goods, 0.05-0.10 percentage point through energy services over roughly six months if sustained, and around 0.04 percentage point through core prices over six to 12 months. The current effect may be smaller because the rise is not expected to be permanent, US natural-gas prices have not risen materially, and supply-driven oil shocks may pass through less broadly than demand-driven shocks. Supply-chain indicators remain elevated amid reduced Strait of Hormuz shipping traffic, although several measures have eased from April-May peaks. AI adoption is another important explanation for the PCE-CPI divergence. UBS estimates AI adoption is adding more than 0.4 percentage point, and possibly 0.6 percentage point, to core PCE inflation, principally through higher software and removable-memory prices and wealth and financial-services effects. These categories have limited CPI weight. At the same time, AI-related investment is supporting US growth beyond the technology sector, including power generation, cooling, electrical equipment, water treatment, energy storage and regulated utilities. Tariff effects are mixed in the near term but remain a medium-term source of persistence. Core-goods inflation has been falling, and IEEPA tariff rebates have reduced net tariff collections and may temporarily reduce core-goods inflation. However, import prices excluding tariffs and shipping costs have risen. UBS argues that tariffs on finished consumer goods, roughly half of the total, have likely mostly passed through after a process that took about a year in 2018-19. The other half, on intermediate and capital goods, may take three to four years to pass through and could restrain the pace of future disinflation even if their broad effect is hard to isolate in CPI or PCE data. Housing should continue to help disinflation, though signals are mixed. UBS projects 12-month PCE housing-rent inflation to reach a 2.4% low in the second half of 2027. Rising vacancy rates should pressure rents, but a slowdown in construction may limit vacancy-rate increases. New-tenant rent growth remains well below pre-pandemic levels but has begun to turn higher. Sampling problems, including falling CPI price-quote counts, may increase monthly CPI volatility and reduce the signal in individual releases; residual seasonality may also hold down monthly core-PCE changes in the second half of the year. Beyond inflation, UBS characterizes the US outlook as bumpy and narrowly driven. GDP growth is being supported mainly by upper-income consumption and AI-related investment. The OBBBA is estimated to add just under 0.5 percentage point of stimulus in 2026, followed by a drag on growth in 2027-28. Household balance sheets remain strong but are increasingly exposed to equity valuations, which account for 37% of aggregate household wealth; credit-card and auto-loan delinquencies continue to rise. Housing fundamentals look weak, labor indicators are mixed, and consumers expect softer job availability. UBS also highlights elevated fiscal deficits, net interest near 20% of federal revenue, and debt-to-GDP projected above 110%. For policy, UBS notes that standard Fed policy rules indicate a funds rate above its current level, but expects the Fed to hold until inflation begins to fall rather than tighten further. Its meeting-by-meeting path reaches a 4.125% midpoint by December 2026, 3.875% by December 2027 and 3.375% by December 2028.

Analysis framework

UBS combines CPI and PCE data, component contributions, historical comparisons, futures curves, high-frequency price indicators, supply-chain measures, rent and labor indicators, and a judgmental decomposition of core PCE inflation. It then links projected inflation drivers to its US growth, fiscal and Federal Reserve outlook.

Methodology notes

• Industry AnalysisVolume-price decomposition

  Inflation-component and contribution analysis

  UBS separates energy, goods, rents and non-rent services to identify why CPI and PCE differ and how each component may affect future inflation.

• MacroeconomicsTaylor rule

  Federal Reserve policy-rule comparison

  The report compares the current funds rate with policy rules to frame the tension between inflation persistence and UBS's expectation that the Fed will hold rather than raise rates.

• Other

  Judgmental decomposition of four-quarter core PCE inflation

  UBS apportions projected core PCE inflation among expectations, resource utilization, energy, tariffs, import prices and residual supply-demand factors.

Key data

• Headline CPI inflation4.25% in May; 3.40% in AugustUBS expects some near-term pickup and limited downward movement until spring.
• Core CPI–core PCE wedge-0.87pp through JulyCompared with a full-sample average of +0.47pp.
• PCE methodology revisionAround -0.25pp to current core PCE inflation through JulyUBS estimate for the September 30 revision.
• Core PCE forecastAbout 2.5% in 2027; essentially 2.0% at end-2028Gradual disinflation path.
• Oil-price rule of thumbUSD10/barrel permanent Brent increase = roughly +0.40pp to headline CPI price levelMost impact arrives quickly through gasoline and energy goods.
• OBBBA stimulusA little less than 0.5pp in 2026UBS expects a subsequent drag on growth in 2027-28.

Impact & implications

UBS expects declining energy and rent pressures eventually to bring inflation lower, but believes delayed tariff effects, elevated non-rent services inflation and supply disruptions will make progress uneven. This backdrop supports a cautious expectation for limited Federal Reserve easing rather than a rapid return to target-consistent core inflation.

Risks

• Crude oil prices could remain materially above the futures curve, delaying the expected decline in headline inflation.
• Persistent supply-chain disruption, including constrained Strait of Hormuz shipping traffic, could sustain cost pressure.
• Tariffs on intermediate and capital goods may continue passing through to consumer prices over several years.
• AI-related demand and higher technology-related prices could keep core PCE inflation elevated.
• CPI sampling difficulties may increase monthly inflation volatility and make trend interpretation less reliable.

What to watch

• The September 30 PCE methodology revision and its effect on the core PCE-CPI gap.
• Brent crude prices, retail gasoline and the shape of the oil futures curve.
• Supply-chain stress indicators, shipping traffic and freight conditions.
• Tariff rebates, customs collections, import prices and delayed intermediate-goods pass-through.
• Housing rents, vacancy rates, new-tenant rent growth and construction activity.
• Labor-market data, consumer unemployment expectations, fiscal deficits and Federal Reserve decisions.