Bank of America revises 2026 inflation forecast ahead of CPI

If you’re anything like me, you’ve been doing a lot of double-taking and head-shaking this year. It seems that almost everything has become more expensive, from grocery store visits and restaurant meals to oil changes. Even visiting my local Walmart, a retailer known for holding the line on prices, has left me disappointed at the register.

Prices are undeniably higher, forcing many Americans to make difficult choices when it comes to spending, such as delaying discretionary purchases to free up more money for essentials.

The situation is particularly frustrating because many prices have risen since spring, and unlike two years ago, the job market is weakening. In September, Consumer Price Index (CPI) inflation rose 3%, continuing its climb since April, when it was 2.3% before most tariffs took effect.

Clearly, something needs to change, which is why many are eagerly awaiting the Bureau of Labor Statistics‘ November CPI report, scheduled for release on Dec. 18, to see if inflation’s recent rise is slowing ahead of next year.

If it is, it could have a significant impact, not only on the amount we’re paying, but also on whether interest rates on loans may decrease next year.

The situation isn’t lost on Bank of America. The 120-year-old bank has navigated plenty of economic cycles, and its economists recently updated their outlook for inflation in 2026.

Inflation rebounded this year on tariff hit

The Washington D.C. shutdown prevented government researchers from collecting price data necessary to calculate the CPI for October, causing the BLS to cancel that report. While we won’t receive the CPI inflation figures for October, they are already at work crunching the numbers for November, and the inflation report is expected to be released mid-month.

Nobody should get their hopes up that inflation has retreated.

Inflation has rebounded since tariffs were enacted in early 2025.

Shutterstock

America remains heavily reliant on imports, particularly from retailers, and tariffs have significantly impacted import prices. According to Yale Budget Lab, the effective tariff rate is 16.8%, the highest since 1935. In January, the rate was just 2.4%.

Companies have negotiated price concessions from suppliers, and they’re absorbing some of the hit out of profits. However, they are still passing along some of the cost increases.

Popular brands like Hoka and Nike, as well as retailers such as Walmart and AutoZone, have at the very least cut back on promotions and selectively increased prices. As a result, more consumers are paying either full price or higher prices for most goods, from sneakers to brake pads.

Harvard’s Pricing Lab has been tracking the evolution of prices on thousands of items at popular retailers. Compared to trends leading up to tariffs, it finds that average prices today are 6.68% higher than they would have been in the absence of tariffs.

And it’s not only import prices that have climbed. Harvard economists have also noted a 4.03% deviation from trend for domestic goods, something they say is due to higher input costs on imported goods needed to build final goods and, generally, an ability to increase prices because rival import prices have risen.

More Economic Analysis:

“Even if they don’t have imported inputs, they compete with imported goods. So, if your competitor is forced to raise prices, that gives you more pricing power and you can raise yours as well, even if your costs have not changed,” said Harvard Pricing Lab’s Alberto Cavallo in an interview with the Federal Reserve Bank of Minneapolis.

Among the hardest hit items have been textiles, including clothing and furniture, much of which is sourced overseas.

Digging deeper across the entire economy, September’s CPI report reveals widespread price increases across a range of goods, including produce, meat, men’s pants, and women’s outerwear — all of which are highly dependent on imports.

Bank of America issues inflation outlook for 2026

While inflation has risen this year since April, Bank of America’s economists’ latest inflation forecast suggests that the worst of the increase may be behind us. The economists calculate that inflation will tick up slightly in the first quarter of 2026, then stabilize before retreating into the year’s end.

Bank of America shared its inflation forecast with TheStreet, based on the core (excluding volatile food and energy) Personal Consumption Expenditures (PCE) index. Directionally, PCE and CPI tend to move together, suggesting we’ll similarly see a flattening of inflation pressures as we get deeper into next year.

Bank of America’s inflation outlook for 2026 by quarter (Core PCE):

Q4 2025: 3%
Q1 2026: 3.1%
Q2 2026: 3.1%
Q3 2026: 3.1%
Q4 2026: 2.8% Source: Bank of America Global Research

Importantly, and perhaps encouragingly, Bank of America’s longer-term inflation outlook suggests inflation will start to retreat again in 2027.

Bank of America’s inflation outlook for 2027 by quarter (Core PCE):

Q1 2027: 2.6%
Q2 2027: 2.5%
Q3 2027: 2.5%
Q4 2027: 2.4% Source: Bank of America Global Research

Bank of America’s CPI outlook, as expected, is similar. Its economists expect core CPI to peak at 3.2% in the second quarter of 2026, retreating to 2.8% by year’s end. In 2027, the trend is expected to continue lower, falling to 2.5% in the second quarter.

Easing inflation would be good news for Fed interest rate cuts, too

One of inflation’s biggest problems — beyond the impact on our wallets — is that it pigeon-holds Federal Reserve monetary policy. The Fed doesn’t set lending rates for credit cards, auto loans, or mortgages, but banks base those lending rates on Treasury bond yields, and those yields move mostly in lockstep with changes to the Fed Funds Rate, which is the rate banks lend each other overnight reserves.

As a result, when the Fed lowers or raises the FFR, it can have a big impact on how much people can afford.

The problem is that the Fed’s rate decisions are based on a dual mandate:

Low unemployment
Low inflation

Those goals are often contradictory, because lower rates spark inflation even as they support employment. Higher rates have the opposite impact.

This dynamic is why the Fed has been slow to embrace interest rate cuts in 2025, fearing that it may fan the flames of inflation, even as tariff price increases already drive up prices. The Fed finally cut rates in September and October, and most believe it will cut again in December because the jobs market is weakening.

Still, for more cuts to happen in 2026, helping would-be borrowers, we may need Bank of America’s forecast to prove correct. If inflation continues to rise at its current pace, the Fed will be hard-pressed to maintain current rates, rather than cut them further and risk a repeat of runaway inflation, as in 2022.

Inflation rebounded this year on tariff hit

September CPI inflation on common categories:

Bank of America issues inflation outlook for 2026

Bank of America’s inflation outlook for 2026 by quarter (Core PCE):

Bank of America’s inflation outlook for 2027 by quarter (Core PCE):

Easing inflation would be good news for Fed interest rate cuts, too