It has now been around eight months since “Liberation Day,” yet the overall inflation outlook in the US has not seen a significant surge. While prices have risen, this increase has not strongly shaped the broader inflation narrative.
Looking ahead to 2026, what can forex traders expect from the inflation story?
Firstly, it is important to understand that the higher tariffs implemented around “Liberation Day” did not cause an immediate impact. It has taken considerable time for these tariffs to filter through to consumer prices, and even now, the full effect on inflation has not been fully reflected.
The clearest evidence of this slow impact shows up in core goods inflation, which has been gradually rising. Apart from that, inflation has been more subdued than many anticipated, particularly considering the worries about tariffs under the Trump administration before April this year.
As we move into 2026, traders should watch out for what might be called an inflation mirage. The Consumer Price Index (CPI) is not truly cooling in a substantial way— inflation is not disappearing. Instead, higher prices have become a permanent feature, and the economy is approaching a new equilibrium level, especially during the second half of next year.
Since the tariffs have taken over six months to impact prices, this delayed effect will influence how base effects shape inflation measurements in 2026, particularly in the latter half of the year. This could lead to a notable drop in inflation data, including the Personal Consumption Expenditures (PCE) index.
If the Federal Reserve retains its independence, this decline could offer a politically convenient justification for rate cuts. It might align with Trump’s agenda, allowing the Fed to ease monetary policy more comfortably.
For forex traders, the key takeaway is to remain cautious when interpreting the CPI data in the second half of 2026. Year-on-year inflation readings may appear to cool, but this will largely reflect base effects rather than actual price decreases. In this context, monthly inflation figures will become a more reliable indicator.
To clarify, imagine tariffs cause the price of a watch to rise from $20 to $25 this year—a 25% inflation increase. Next year, if the price holds at $25, the year-on-year inflation rate will read 0%, even though prices have not fallen. This example highlights why the base effect matters so much.
Why is this important? Because it directly affects expectations for Federal Reserve policy. If rate cuts remain challenging in the first half of 2026, the Fed might use the inflation dip caused by base effects to justify easing, thus aligning policy with political pressures.
Ultimately, the question facing the Fed will be whether to look through the base effects and maintain its current policy stance, or to allow the new chair to pursue more accommodative measures that support the political agenda.
Regardless of the policy outcome, traders should remember that falling inflation rates do not equate to lower prices—a reality that has shaped the economy for decades.
Original Source: Justin Low of investinglive.com
