US Dollar: Inflation outlook and Fed path – UOB

UOB’s Alvin Liew assesses United States (US) inflation and Federal Reserve (Fed) policy after the July Consumer Price Index (CPI) report. Liew notes headline and core CPI remain above the Fed’s 2% target but sees inflation gradually easing, with headline CPI averaging 3.5% and core 2.8% in 2026. Liew expects the Fed to keep rates on hold through 2026 before starting gradual cuts in 2027.

Inflation risks and extended Fed pause

"The inflation outlook has improved but upside risks remain, largely linked to energy prices and geopolitical developments: While headline and core inflation continue to move lower and are consistent with softer domestic demand conditions, both remain above the Fed's 2% target."

"Overall, while the Jul CPI report reduced immediate concerns that US inflation is persistently high, it is also too early to declare victory over inflation, and the resumption of disinflationary trend is likely to be on an uneven path and susceptible to external shocks."

"We maintain a balanced near-term inflation outlook, expecting headline CPI to average around 3.5% and core CPI around 2.8% in 2026, while also retaining our base case that the Fed will remain on hold through 2026 before resuming gradual rate cuts in 2027."

"Unsurprisingly, the risk to the CPI outlook remains highly dependent on geopolitical developments in the Middle East. If regional tensions continue to ease and energy prices remain stable or move lower, headline inflation could moderate further through the remainder of 2026."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)