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Fixed Income Insights

US inflation: Sticky or stuck?
03 June 2026
    Articles
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    In a nutshell

    • US inflation is expected to be “sticky” rather than “stuck”, with core inflation drifting slowly towards 2per cent in 2027 as labour, housing, goods and energy shape the path.
    • Labour‑market‑driven inflation pressures look contained, as slower employment growth, moderating wages and higher productivity keep unit labour cost growth subdued, reducing the risk of another 2021–2022‑style surge.
    • Housing should support gradual disinflation, with slowing market rents and high mortgage rates limiting renewed price pressures, although long lags in official shelter measures mean the impact will be drawn out.
    • Tariffs are keeping US core goods inflation above its pre‑tariff trend, although there are tentative signs the pass-through may now be largely complete. Additionally, China’s weak export prices limits the scope for sustained US goods price inflation.
    • Energy remains a key uncertainty, with Middle East‑driven oil scenarios potentially lifting headline inflation temporarily, though modelled impacts on core are smaller and fade as oil prices normalise.
    • Baseline projections see US core CPI around 2.5-3.0 per cent in the near term but easing towards 2 per cent in 2027, limiting the scope for Federal Reserve rate cuts this year.

    US inflation: Sticky or stuck?

    Cooling labour markets and softer shelter costs contrast with tariff driven goods stickiness and oil uncertainty, pointing to US core inflation drifting towards 2 per cent only slowly, with 2 per cent acting more as a floor than an average

    A practical US inflation forecasting process splits core inflation into labour, housing and goods, then adds food and energy.

    A central question for the US this year is whether inflation proves merely “sticky” around current levels or becomes “stuck” materially above the Federal Reserve’s 2 per cent target.

    A simple way to frame the US inflation outlook is to split core inflation into three domestic drivers – labour, housing and goods – and then add food and energy to derive headline inflation. Traditional large macro models based on the output gap have struggled to predict inflation accurately, while highly granular models often work only because errors across hundreds of CPI components offset each other. The streamlined framework focuses on how unit labour costs drive core services ex‑shelter, how the housing market feeds into shelter inflation given its large weight in CPI and PCE, and how globally determined goods prices transmit external shocks into domestic inflation, with energy, particularly oil, now heavily influenced by Middle East geopolitics.

    Unit labour costs have historically been a good guide to the underlying trend in US core inflation excluding shelter, with 2021–2022 a notable exception when aggressive policy stimulus allowed margins and prices to rise faster than labour costs. Over the last one to two years, the labour market has cooled, wage growth has moderated and productivity has rebounded, resulting in relatively subdued unit labour cost growth.

    Figure 1: Slow employment growth and moderating wages

    Figure 1: Slow employment growth and moderating wages

    Click the image to enlarge

    Source: Macrobond, HSBC AM, March 2026.

    These developments point to limited labour‑market‑driven inflation pressure over the next twelve months. A repeat of the 2021–2022 pattern, where policy settings enabled a decoupling of inflation from labour costs, appears unlikely given only modest fiscal easing and a Federal Reserve that is not signalling aggressive rate cuts.

    Housing is central because shelter accounts for around 40 per cent of core CPI and roughly a quarter of core PCE. Market‑based rent measures such as the Zillow Observed Rent Index typically lead the official shelter components, although post‑pandemic lags have been unusually long both on the way up and on the way down. Recent data show observed rents slowing further, which points to additional downside for measured shelter inflation as official indices catch up. At the same time, 30‑year mortgage rates remain above 6 per cent, restraining housing activity and house price appreciation and limiting the scope for renewed upward pressure on rents.

    Figure 2: New rents remain subdued

    Figure 2: New rents remain subdued

    Click the image to enlarge

    Source: Macrobond, HSBC AM, May 2026.

    Meanwhile, a year on from ‘Liberation Day’, the core goods CPI excluding cars and trucks is running about 3.0 per cent above its 2024 trend, suggesting that tariff‑induced price increases have made a significant contribution to the stickiness of US inflation. The April CPI, however, showed a relatively muted increase in goods prices. Combined with evidence showing revenues from the tariffs are now falling, we may now be at the point that this source of inflationary pressure is beginning to fade.

    Figure 3: Upward core goods CPI from tariffs

    Figure 3: Upward core goods CPI from tariffs

    Click the image to enlarge

    Source: Macrobond, HSBC AM, May 2026.

    Absent the tariffs, US core goods price inflation would likely have been much more subdued, something highlighted by the declining trend in China’s export prices. China’s role as the world’s largest manufacturer and marginal price setter means it is difficult to generate sustained US goods price inflation in this environment.

    The main risk to this pattern of deflationary Chinese export prices is a sustained rise in global energy costs, especially oil, given the historically tight relationship between oil prices and Chinese producer price inflation. The evolution of the Middle East conflict therefore matters not only for direct energy pass‑through into headline inflation but also for the trajectory of global goods prices via Chinese producer and export prices.

    Figure 4: China exporting deflation

    Figure 4: China exporting deflation

    Click the image to enlarge

    Source: Macrobond, HSBC AM, May 2026.

    US energy services inflation, dominated by electricity, has been running somewhat above its pre‑pandemic average but well below earlier peaks. Aggregate energy inflation, however, has not been a sustained driver of higher inflation because, until recently, falling energy commodity prices, particularly oil, have offset the modest strength in services.

    Figure 5: Energy prices in perspective

    Figure 5: Energy prices in perspective

    Click the image to enlarge

    Source: Macrobond, HSBC AM, May 2026.

    The current inflationary narrative around electricity prices is shaped by localised pressures rather than a broad national surge, with states such as Maryland, Pennsylvania and Virginia seeing particularly strong increases in areas with heavy data‑centre construction. For households in those regions, electricity bills are rising faster than the national average, but at the aggregate level electricity prices are not yet exerting outsized upward pressure on overall inflation.

    Figure 6: Relationship between gas and electricity prices less reliable than it was

    Figure 6: Relationship between gas and electricity prices less reliable than it was

    Click the image to enlarge

    Source: Macrobond, HSBC AM, May 2026.

    In fact, US natural gas prices have correlated closely with CPI electricity prices, and current gas futures suggest some near‑term moderation in electricity inflation. That said, the relationship has weakened in recent years with electricity prices running stronger than gas prices alone implied during 2023 and 2024. From the perspective of the next twelve months, energy services are therefore not expected to be a major independent source of inflation pressure nationally.

    Recent events have shifted attention to oil as a key source of uncertainty for the inflation outlook. Although the brent spot price has been above UD 100/barrel for a sustained period and the futures curve has traded within a wide range, the market is still broadly expecting the price to decline through the remainder of the year and into 2027.

    Figure 7: Market pricing a decline in the oil price

    Figure 7: Market pricing a decline in the oil price

    Click the image to enlarge

    Source: Macrobond, HSBC AM, May 2026.

    Oxford Economics’ large-scale macroeconomic model suggests that if the brent oil price were to move back towards the low end the range implied by the futures curve in recent weeks, core inflation would be around 0.3–0.4 percentage points higher over the next year than it would have been without this shock. If the oil price instead tracks the upper end of the futures range, the increase could be 0.6–0.8 percentage points. Even in this higher oil price scenario, the effect is temporary: inflation is not expected to stay elevated into 2027, with the impact fading to zero by mid-2027.

    Figure 8: Model simulations – would high oil price result in demand shock?

    Figure 8: Model simulations – would high oil price result in demand shock?

    Click the image to enlarge

    Source: Oxford Economics, Macrobond, HSBC AM, May 2026.

    In conclusion, with a baseline that assumes the oil price declines broadly in line with the futures curve, combined with our analysis of labour, housing and goods, we expect US core CPI to remain relatively sticky through the remainder of the year. We see the year-on-year rate hovering in the 2.5-3.0 per cent range before easing gradually in 2027, as tariff effects fully feed through, second round impacts from energy prices fade, and shelter inflation continues to cool.

    In this context, 2 per cent may act more like a floor for core inflation than the midpoint of a target range. Outcomes meaningfully below 2 per cent would likely require a recession. As a result, the Federal Reserve is likely to keep policy on hold through 2026, with modest rate cuts becoming more plausible in early 2027.

    Source: HSBC Asset Management, May 2026. The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target.

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    Authors

    • Dominic Bryant
      Dominic James Bryant Director of Macro Strategy
    • Sai Muvvala
      Sai Muvvala Economic Analyst
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