Zhongjin: In 2026, US inflation may show higher stickiness, with fiscal and monetary policies expected to marginally ease.

CICC released a research report stating that the US economy will show significant differentiation in 2025. On one hand, due to the impact of tariffs and immigration policies, traditional industries such as manufacturing and real estate are facing dual pressures of rising costs and policy uncertainty, leading to a slowdown in economic activities. On the other hand, driven by the wave of artificial intelligence (AI), capital expenditures in the technology industry are on the rise and have become a key engine supporting growth. The report believes that in 2026, the efficiency improvement brought by AI may not fully offset the negative impacts, and economic supply growth will face constraints. The marginal boost effect of AI on economic growth may be weakened compared to 2025. The US economy in 2026 may face pressure at both ends of supply and demand, and inflation may show higher stickiness in this context. From a policy perspective, fiscal and monetary policies are expected to marginally ease in 2026, but the overall stimulus may be limited. The main points of CICC are as follows: The US economy will show significant differentiation in 2025. On one hand, due to the impact of tariffs and immigration policies, traditional industries such as manufacturing and real estate are under pressure, leading to a slowdown in economic activities. On the other hand, driven by the wave of artificial intelligence (AI), capital expenditures in the technology industry are on the rise. Against a backdrop of increasing importance of security, the US needs to promote the development of high-tech industries while also guiding the return of traditional manufacturing. In the long term, it remains to be seen whether tariffs can promote the return of manufacturing, but in the short term, they may instead raise inflation and restrain growth. Looking ahead to 2026, these factors may lead to new adjustments in the supply-demand pattern. Specifically, the US economy will face two challenges. Firstly, there is an increase in tariffs from the supply side and a slowdown in population growth. Due to the lag in tariff revenue, its impact on the economy has not been as rapid as previously expected, but this also means that the relevant effects will continue to be released in 2026. Especially as companies evade tariffs by importing in advance, this buffer effect will gradually diminish in the future, and supply cost pressures may further manifest. At the same time, immigration restrictions and deportation policies will significantly slow down population growth, inhibiting labor supply and dragging down demand in areas such as housing and consumption; if productivity does not increase synchronously, the potential economic growth rate will face downward pressure. Secondly, there is a fluctuation in the AI investment cycle from the demand side. The contribution of AI to economic growth is increasingly evident, but at this stage, it is mainly reflected in substantial capital expenditures. With the rapid expansion of investment scale, the marginal efficiency of capital will inevitably decrease, and the investment growth rate will also tend to slow down, which may reduce the pull effect of AI on GDP growth in 2026 compared to 2025. Meanwhile, the report believes that other areas of demand will also face cooling: the real estate market will go through inventory reduction, and construction investment will fall back after policy subsidies taper off; consumption shows a "K-shaped" feature - high-income groups maintain steady spending, while middle and low-income groups are affected by slowing wages and employment pressures, further weakening purchasing power. Regarding inflation, the report expects it to show a certain stickiness. Core commodities still have room for price increases under the influence of tariffs. Rental inflation will continue its current trend of slowing down. Non-rental services (supercore) prices are supported by structural demand and labor costs and still have resilience. Consumer inflation expectations face upward risks, and the re-anchoring of inflation psychology will make it more difficult for the Federal Reserve to achieve its targets. On the policy front, fiscal and monetary policies will marginally ease, but the overall stimulus may be limited. The fiscal deficit expansion brought about by the Trump administration's "Big Beautiful Law" will be partially offset by tariff revenue. The Federal Reserve may continue to cut interest rates due to a slowdown in employment, but given stubborn inflation, it is also reluctant to excessively ease monetary policy. In addition, the "refinancing effect" of this round of interest rate cuts is weaker than in previous rate-cutting cycles, which will weaken its stimulus effect. The report expects the Federal Reserve to cumulatively cut interest rates by 50 basis points in 2026, bringing the federal funds rate to a range of 3%-3.25%, slightly below the neutral rate level of 3.5%. The report predicts that the actual GDP growth rate in the US will be 1.7% in 2026. In the first half of the year, growth will still face downward pressure due to tariffs and immigration policies, with the main risks coming from "stagflation-like" conditions. In the second half of the year, with the combined support of fiscal and monetary policies, economic activities are expected to improve. The core PCE inflation rate is expected to remain around 3% for the whole year. Upside risks to the forecast come from trade and geopolitical tensions easing, significant improvement in the global economic outlook, boosting confidence in businesses and residents. Downside risks come from three aspects: 1) continued weakening of the job market, with an increase in the unemployment rate exceeding expectations; 2) increased fluctuations in AI profitability, with capital expenditure growth lower than expected; 3) inflationary pressures exceeding expectations, making the pace of Fed rate cuts slower than anticipated.