Shenwan Hongyuan released a research report stating that in 2026, US inflation may exhibit a "high-first, low-later" characteristic. The first half of the year will see the "last mile" of tariff pass-through, combined with the implementation of tax cuts. If the pass-through rate approaches 70%, inflation could demonstrate stronger "stickiness," while the second half of the year might be a favorable period for disinflation. The bank predicts that, assuming tariff pass-through rates of 90%, 70%, and 50%, the year-on-year core PCE at the end of 2026 will be 2.8%, 2.6%, and 2.5%, respectively. Federal Reserve monetary policy and inflation risks are mutually reinforcing. If the Fed adheres to a data-dependent approach, inflation risks may be controllable. In 2026, the Fed's interest rate cut cycle is likely to be "back-loaded." In the first half, the US macroeconomic landscape may feature resilient growth, stabilizing employment, and inflation hovering near its peak, leading the Fed to potentially pause rate cuts; in the second half, with the onset of disinflation, the Fed is expected to restart cutting rates, with a total of 1-2 cuts. Shenwan Hongyuan's main views are as follows:

Since the implementation of "reciprocal tariffs," the risk of US re-inflation has been manageable and has not yet become a primary concern for monetary policy and capital markets. Why has the inflationary impact of tariffs consistently fallen short of expectations, and could it become an "underestimated" risk in 2026? First, the "inflationary effect" of reciprocal tariffs: Why has it been systematically lower than expected this time? Since April 2025, US inflation has begun to rebound, but the readings have consistently been weaker than anticipated. In 2025, the main driver of US "re-inflation" came from the core goods component, while core services continued their cooling trend. In December 2025, the US CPI was only 2.7% year-on-year, up from a low of 2.3% in April; from a month-on-month perspective, US inflation has mostly underperformed expectations since April 2025. The inflationary effect of tariffs is traceable, but the transmission path is not pulse-like; instead, it is stair-step in nature. Examining "excess" inflation and seasonal factors reveals traces of tariffs' inflationary effect; however, the transmission path of tariffs is not a one-off shock. Cavallo (2025) points out that tariffs could raise the US CPI by approximately 0.65 percentage points. In recent months, the progress of tariff pass-through has even stalled. The stair-step characteristic of tariff transmission is related to the path of tariff rates. As of October 2025, the US effective tariff rate was only 12.4%, lower than the theoretical rate of 15.7%. Factors such as shipping delays and front-running imports initially hindered the increase in the effective rate, but tariff exemptions and shifts in countries of origin may limit the potential for rate increases. After excluding the effect of country switching, the room for the effective tariff rate to increase is only about 2 percentage points.

Second, the "cost accounting" of tariffs: How much room do companies have left to pass on tariff costs? The fact that businesses initially absorb more of the tariff costs and then gradually pass them on to consumer prices is one explanation for the manageable inflation pressure. The bank estimates that, as of September 2025, exporters, importers, and consumers bore approximately 6%, 37%, and 57% of the tariff costs, respectively. From April to August, US consumers bore only about one-third of the tariff costs, while the proportion borne by foreign exporters remained consistently small, which aligns with the experience from the "Tariff 1.0" period. Why did businesses absorb more tariff costs initially after the reciprocal tariffs were implemented? On one hand, high uncertainty surrounding tariff policy and weakening US domestic demand were core constraints on price hikes; on the other hand, "excess imports" hoarded by US businesses from April to September 2025 delayed price increases. Historical experience from the "Tariff 1.0" period also shows that companies can only "temporarily" resist price hikes, and inflation will still rise with a "lag." Since the fourth quarter of 2025, the momentum for businesses to pass on tariff costs has strengthened, and 2026 will still see the "last mile" of this process. The stock of "excess" imports was depleted by September 2025; in the third quarter of 2025, household consumption contributed 56% to US economic growth, showing significant improvement; in the first half of 2026, total household tax rebates are expected to increase by 30%, with the average rebate per person potentially rising by $700-$1000.

Third, will "re-inflation" return? "There's no smoke without fire"; risks may lie beyond tariffs. In 2026, US inflation may show a "high-first, low-later" pattern. The first half will be the "last mile" of tariff pass-through, coupled with tax cut implementation. If the pass-through rate moves towards 70%, inflation could exhibit greater "stickiness," while the second half might be a tailwind for disinflation. The bank forecasts that, assuming tariff pass-through rates of 90%, 70%, and 50%, the year-on-year core PCE at the end of 2026 will be 2.8%, 2.6%, and 2.5%, respectively. Besides tariffs, what other risks exist? Upside risks include cyclical factors and metals inflation; downside risks involve productivity gains and IEEPA tariff rulings, among others. If the US economy overheats, the "stickiness" of services inflation could intensify. Soaring global metal prices might push up inflation through the PPI-CPI channel. On the downside, key factors to watch include AI-driven productivity growth acceleration, along with tariff exemptions and the implementation of rulings. Federal Reserve monetary policy and inflation risks are intertwined. If the Fed persists with a data-dependent framework, inflation risks could remain manageable. In 2026, the Fed's rate-cutting cycle is expected to be "back-loaded." The first half of the year might see resilient US growth, stabilizing employment, and inflation peaking, leading the Fed to potentially pause cuts; in the second half, as disinflation takes hold, the Fed is likely to resume cutting rates, totaling 1-2 cuts. Risk warnings: Escalation of geopolitical conflicts; US economic slowdown exceeding expectations; the Federal Reserve turning more hawkish than anticipated.