by Calculated Risk on 12/29/2025 03:55:00 PM

Earlier I posted some questions on my blog for next year: Ten Economic Questions for 2026. Some of these questions concern real estate (inventory, house prices, housing starts, new home sales), and I posted thoughts on those in the newsletter (others like GDP and employment will be on this blog).

I'm adding some thoughts and predictions for each question.

Here is a review of the Ten Economic Questions for 2025.

5) Inflation: Core PCE was up 2.8% YoY through September. This was down from a peak of 5.6% in early 2022.  The FOMC is forecasting the YoY change in core PCE will be in the 2.4% to 2.6% range in Q4 2025. Will the core inflation rate decrease further in 2026, and what will the YoY core inflation rate be in December 2026?

Although there are different measures for inflation, they all show inflation above the Fed's 2% inflation target on a year-over-year basis.

Note:  I follow several measures of inflation, including median CPI and trimmed-mean CPI from the Cleveland Fed.  Also core PCE prices (monthly from the BEA) and core CPI (from the BLS).

Click on graph for larger image.

On a year-over-year basis, the median CPI rose 3.1% in November (down from 3.5% YoY in September), the trimmed-mean CPI rose 2.9% (down from 3.3%), and the CPI less food and energy rose 3.0% (down from 3.2%). 

Core PCE is for September was up 2.8% YoY, down from 2.9% in August.

The Fed is projecting core PCE inflation will decrease to 2.4% to 2.6% by Q4 2026. 

The good news is we should expect a further decline in housing inflation (asking rents have been flat for 3 years, and it takes time for the previous rent increases to filter through to renewals).  And inflation was fairly high in January last year (CPI up 5.7% annual rate, Core CPI up 5.5% annual rate) - so it is likely YoY measures of inflation will decline further in January.

From Goldman Sachs economists last week:

"We expect core PCE inflation to slow to 2.1% by the end of 2026 as tariff pass-through fades and wage growth and shelter inflation continue to fall."

My guess is core PCE inflation (year-over-year) will decrease in 2026 (from the current 2.8%) but still be above the Fed's 2% target by Q4 2026 (and above Goldmans forecast of 2.1%).  

Here are the Ten Economic Questions for 2026 and a few predictions:

• Question #7 for 2026: How much will wages increase in 2026?

• Question #8 for 2026: How much will Residential investment change in 2026? How about housing starts and new home sales in 2026?

• Question #9 for 2026: What will happen with house prices in 2026?

• Question #10 for 2026: Will inventory increase further in 2026?

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