TD Securities expects US PCE inflation to strengthen in December. It forecasts core PCE at 0.25% month on month and headline PCE at 0.27%. That would put core PCE at 2.9% year on year and headline PCE at 2.8%.
The firm expects supercore PCE at 0.26% month on month. It says food prices should help lift the headline reading. It also notes that January CPI was softer than expected, especially in services. It adds that some CPI strength is unlikely to show up in its PCE forecast.
Tariffs And Near Term Inflation
TD Securities expects higher tariffs to lift consumer prices in the near term. It forecasts core CPI inflation to peak near 2.8% year on year in Q2 2026, with core PCE reaching similar levels.
It expects inflation to stay stubborn in the first half of 2026, then cool in the second half as disinflation resumes. This article was produced using an AI tool and reviewed by an editor, and it was published by the FXStreet Insights Team.
The inflation outlook for the first half of the year looks more persistent than many expected. We saw this in the firm December 2025 Personal Consumption Expenditures (PCE) report and in January CPI. January CPI was not as hot as feared, but it still suggests ongoing price pressure. That makes it harder to argue that the Federal Reserve can start cutting rates soon.
Much higher tariffs, driven by new trade policies taking effect this quarter, are now a key reason prices could rise. As a result, we expect core inflation measures to move higher and peak in the second quarter. We now project core CPI to reach a cycle high near 2.8% year over year by late spring.
Market Implications For Rates
This argues for interest-rate positions that reflect a more patient Fed. The market is starting to remove the chance of a rate cut in the first half of 2026, which is a big change from a few weeks ago. Based on the CME FedWatch Tool, the odds of a rate cut by June are now below 25%, down from over 50% at the start of the year.
This gap between a hawkish Fed and hopes for falling inflation could increase volatility. With uncertainty around the real impact of tariffs and whether services inflation will stay sticky, options may help as a hedge. We are considering positions such as VIX call options or straddles on major indices to protect against a potential market drop.
This setup is similar to 2022, when early signs of cooling inflation were followed by repeated upside surprises. That period showed that the last stage of disinflation can be the hardest. The Fed had to stay aggressive then, and we see a similar risk today if the market moves too far ahead of the data.
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