Inflation Is Ready to Come Roaring Back

A shopper carries plastic bags in the Chinatown neighborhood of San Francisco. (David Paul Morris/Bloomberg)

Key Points

• Economists anticipate a rise in inflation in the new year, with CPI inflation expected to peak at 3.4% to 3.5% and remain above 3% through 2026.
• The November consumer price index reading of 2.7% was likely understated due to methodological issues and delayed data collection after a government shutdown.
• Higher tariff pass-through rates, increased tax refunds, and potential government stimulus checks are expected to contribute to inflationary pressures.

As Americans look ahead to the new year, it’s tempting to think that inflation is waning. But economists expect that households will experience another uptick before inflation resumes a more sustained fall.

The latest reading of the consumer price index was just 2.7% year over year in November, down from 3% in September, according to the Bureau of Labor Statistics. But the report was riddled with methodological issues after the 43-day government shutdown prevented the statistical agency from collecting and processing data.

Beyond the wonky November readings, economists believe that higher tariff pass-through rates from businesses to consumers, larger tax refunds and even some proposed policies designed to improve affordability will push inflation higher in the new year.

Expect CPI inflation to peak at 3.4% to 3.5% next year, likely ending 2026 above 3%, says Olu Sonola, head of U.S. economic research at Fitch Ratings. He believes that inflation won’t dip below 3% on a sustained basis until 2027.

The recent CPI release, despite its lower reading, wasn’t analytically useful enough to change the forecast, Sonola says. Shutdown-related methodological challenges and late price data collection in November likely skewed the overall picture.

The BLS “carried forward” prices from September to stand in for the uncollected October values, economists at J.P. Morgan explained. In practice, that meant there were zero price changes built into the November index levels. “This certainly biased down measured inflation, and it may have been exacerbated by November price collection starting later in the month than usual once furloughed BLS workers were back on the job,” the J.P. Morgan team wrote. “That likely oversampled holiday sale prices relative to a typical November, further depressing last month’s inflation readings.”

In fact, the probability that the U.S. will have higher inflation in December and the first quarter of 2026 has likely increased after the surprisingly low November CPI data, says Raymond James Chief Economist Eugenio Aleman.

The low reading is going to be corrected over time as clearer data is collected in the coming months. But that means the public might see higher inflation for December, January, February, March than what we were expecting before, Aleman adds.

Beyond the calculation issues, companies across the spectrum have also indicated they plan price increases in the new year. The Federal Reserve’s latest Beige Book, an anecdotal report of economic conditions across the 12 regional districts, noted that during October into mid-November, inflation rose moderately. Higher input costs were more widespread in the manufacturing and retail sectors due to tariffs. The recent surveys of manufacturing purchasing managers have recorded a rebound in services price inflation, another indicator that there’s still inflation in the pipeline.

Retailers like Walmart have also warned that price increases due to tariffs are coming. “As we replenish inventory at post-tariff price levels, we’ve continued to see our costs increase each week, which we expect will continue into the third and fourth quarters,” Walmart CEO Doug McMillon said during an earnings call in August.

Since Walmart is a price leader, there is a strong risk that everybody else will likely follow suit if the retail giant raises prices, Aleman says.

Further confounding the picture, there is uncertainty whether tariffs will remain in place. The Supreme Court is expected to rule next year on whether President Donald Trump overreached his authority to implement tariffs under the International Emergency Economic Powers Act.

Even if many tariffs are ruled illegal, importers who have paid them may not get reimbursements, says Diane Swonk, chief economist at KPMG. Large firms are more likely to recoup refunds than smaller businesses, so there’s still a risk that the tariff pass-through rate increases in the new year.

Another driver of inflation next year will likely come from bigger income-tax refunds. The One Big Beautiful Bill Act, signed into law in July, included provisions that could lead to bigger refunds, including deductions of overtime and tip payments from taxable income for qualified employees.

Additionally, Americans will be able to deduct interest paid on loans used to purchase a qualified vehicle, and many seniors ages 65 or older may claim an additional $6,000 deduction. On average, Piper Sandler estimates that tax refunds are expected to be $1,000 higher than last year.

“What I’m worried about is that we’re gonna be adding fiscal stimulus in the beginning of the year at a time when the bulk of the effects of the tariffs are likely to hit,” Swonk says.

Wage pressures also remain in some industries. In recent months, while overall wage growth has slowed, sectors like utilities and food processing have experienced wage gains. The utilities sector pay jump is likely due to increased demand for artificial intelligence, while the wage acceleration in food processing is likely due to restricted immigration cutting into the labor supply.

Swonk estimates that nondurable goods wages accelerated at a 1.1% rate over the two months. As those changes hit the service sector, it could lead to further pricing pressures. “It’s really starting to look like it could be, there could be some stickiness out there,” she says. Swonk estimates that the peak in inflation will hit in the first and second quarter, with the Fed’s preferred inflation measure—the Personal Consumption Expenditures Price Index—hitting 3.1%, up from 2.8% year over year growth in September. CPI, which typically runs a bit hotter, will probably peak a bit higher.

Government largess could add to the inflationary pressure. National Economic Council Director Kevin Hassett said Sunday that he expects President Donald Trump to push for legislation that would send $2,000 tariff checks to American households next year.

“I would expect that in the new year, the president will bring forth a proposal to Congress to make that happen,” Hassett said on “Face the Nation with Margaret Brennan.”

Those types of stimulus checks could prove problematic for inflation, says Wayne Winegarden, senior fellow in economics at the free-market Pacific Research Institute. “It’s not an effective stimulus and it actually accentuates inflation because we’re goosing up aggregate demand,” Winegarden says.

“If they do that next year because of the election and the affordability concerns that will have the effect of chasing our tail—and we’re gonna just ramp up inflation even worse,” Winegarden says.

So while the inflation picture got a bit of a preholiday glow, Americans should be prepared for another year of higher prices.

Write to Megan Leonhardt at megan.leonhardt@barrons.com