Shenwan Hongyuan Group: In 2026, US inflation may show a "high before low" pattern.

Shenwan Hongyuan Group released a research report stating that in 2026, US inflation may exhibit a "high-low" pattern. The first half of the year will be the transmission of tariffs as the "last mile", combined with the implementation of tax cuts. If the transmission rate approaches 70%, inflation may show stronger "stickiness", and the second half of the year may be a period of disinflation. The bank predicts that assuming transmission rates of 90%, 70%, and 50%, the core PCE year-on-year at the end of 2026 will be 2.8%, 2.6%, and 2.5% respectively. The Fed's monetary policy and inflation risks complement each other. If the Fed sticks to a data-dependent model, inflation risks may be controllable. In 2026, the pace of the Fed's interest rate cuts may be "postponed". In the first half of the year, the characteristics of the US macro economy may be characterized by resilient growth, stable employment, and inflation peaking, and the Fed may pause interest rate cuts; in the second half of the year, with the beginning of disinflation, the Fed will resume interest rate cuts, with a total of 1-2 times. Shenwan Hongyuan Group's main points are as follows: Since the implementation of "tit-for-tat tariffs", the risk of re-inflation in the US is controllable and has not yet become the main contradiction of monetary policy and capital markets. Why has the inflation effect of tariffs continued to be lower than expected and could it become a "underestimated" risk in 2026? 1. The "inflation effect" of "tit-for-tat tariffs": Why has it been systematically lower than expected this time? Since April 2025, US inflation has started to rebound, but the readings have remained weaker than expected. In 2025, the driving force for the US "re-inflation" mainly came from core commodity subcomponents, while core services continued to cool down. In December 2025, the US CPI year-on-year was only 2.7%, with a low point of 2.3% in April; from a month-on-month perspective, since April 2025, US inflation month-on-month has been weaker than expected in most cases. The inflation effect of tariffs is traceable, but the transmission path is not pulse-like, but rather step-like. From the perspective of "excess" inflation and seasonality, the inflation effect of tariffs is traceable; however, the transmission path of tariffs is not pulsed. Cavallo (2025) pointed out that the increase in tariffs on the US CPI is about 0.65 percentage points. In recent months, the progress of tariff transmission has even stagnated. The step-like characteristics of tariff transmission are related to the path of tariff rates. As of October 2025, the effective tariff rate in the US was only 12.4%, lower than the theoretical rate of 15.7%. Transportation delays, rush imports, once hindered the increase in the effective tariff rate, but tariff exemptions, changes in import country, or restrictions still have room to increase the tariff rate. Excluding country conversion factors, the space for an increase in the effective tariff rate is only 2 percentage points. 2. The "cost accounting" of tariffs: How much room do companies have to pass on tariffs? Companies bear more tariffs and then gradually pass them on to consumer prices, which is an explanation for the manageable inflation pressure. The bank estimates that as of September 2025, exporters, importers, and consumers bear 6%, 37%, and 57% of the cost of tariffs, respectively. From April to August, US consumers only bore about a third of the cost of tariffs, and overseas exporters continued to bear a relatively small proportion, consistent with the experience of tariff 1.0. After the implementation of "tit-for-tat tariffs", why do companies bear more tariffs first? On the one hand, there is a high degree of uncertainty in tariff policies, and the weakening of US economic demand is the core constraint on price increases; on the other hand, from April to September 2025, the excess imports accumulated by US companies delayed the price increase. Historical experience during the tariff 1.0 period also shows that companies can only temporarily hinder price increases, and inflation will still rise "laggingly". Since the fourth quarter of 2025, the momentum of companies passing on tariffs has strengthened, and there is still the "last mile" in 2026. The "excess" imports were exhausted by September 2025; in the third quarter of 2025, consumer contributions accounted for 56% of the US economic growth rate, showing significant improvement; in the first half of 2026, the total amount of consumer tax refunds may increase by 30%, and the per capita tax refund may increase by $700-1000. 3. Will "re-inflation" come again? "Where there's smoke, there's fire", risks may be beyond tariffs In 2026, US inflation may exhibit a "high-low" pattern. The first half of the year will be the transmission of tariffs as the "last mile", combined with the implementation of tax cuts. If the transmission rate approaches 70%, inflation may show stronger "stickiness", and the second half of the year may be a period of disinflation. The bank predicts that assuming transmission rates of 90%, 70%, and 50%, the core PCE year-on-year at the end of 2026 will be 2.8%, 2.6%, and 2.5% respectively. What other risks exist beyond tariffs? Upside risks include cycle and metal inflation; downside risks include productivity and IEEPA tariff rulings. If the US economy overheats, service inflation may strengthen. A surge in global metal prices may boost inflation through the PPI-CPI channel; on the downside, the focus is on AI driving an increase in productivity growth rate, as well as tariff exemptions, rulings coming into effect. The Fed's monetary policy and inflation risks complement each other. If the Fed sticks to a data-dependent model, inflation risks may be controllable. In 2026, the pace of the Fed's interest rate cuts may be "postponed". In the first half of the year, the characteristics of the US macro economy may be characterized by resilient growth, stable employment, and inflation peaking, and the Fed may pause interest rate cuts; in the second half of the year, with the beginning of disinflation, the Fed will resume interest rate cuts, with a total of 1-2 times. Risk warning: Escalation of geopolitical conflicts; US economic slowdown exceeding expectations; Fed turning "hawkish" more than expected.