The 2026 U.S. economy is poised for continued growth, supported by fiscal stimulus, investment in artificial intelligence (AI), and accommodative policy. However, stubborn inflation presents significant challenges for central banks and investors alike, complicating the path forward.

A year ago, inflation was expected to decline. Instead, the Consumer Price Index (CPI) has held at 3.0%, driven by strong demand, slow declines in shelter prices, and structural supply-side changes. Research from the San Francisco Federal Reserve indicates that today’s inflation is primarily demand-driven, a key point since monetary policy targets demand.

Core inflation measures have also been stalled. Some indicators, such as the New York Federal Reserve’s multivariate gauge, even signal a potential reacceleration of core Personal Consumption Expenditures (PCE) inflation. Accommodative financial conditions, ongoing fiscal stimulus, and a tight labor market are compounding factors, making it increasingly difficult for the Federal Reserve to restrain inflation. These dynamics represent a sharp contrast to the past two decades, during which central banks could largely “look through” supply-side shocks and maintain lower interest rates.

The Fed recently hinted at a pause in rate cuts, but easing continued in December, with the federal funds rate nearing the neutral level of 3%. Even so, several factors suggest rates may need to remain above neutral for longer:

  • Sticky Inflation: CPI above 3% indicates ongoing inflationary pressure
  • Accelerating Growth: Strong economic growth risks fueling further inflation
  • Supply Constraints: Labor shortages and supply chain disruptions support wage and price growth
  • Financial Conditions: Loose financial conditions suggest that monetary policy is already accommodative

These factors limit the Fed’s ability to ease policy without risking further inflation, which could lead to more aggressive interventions down the line.

For investors, persistent inflation and strong demand pose significant challenges to monetary policy. While AI-driven productivity gains may eventually contribute to long-term disinflation, inflationary pressures are likely to dominate in the near term. Diversification and quality assets remain critical.

As we move through 2026, navigating these economic complexities will require a close watch on policy shifts and broader trends. Understanding the connections between demand, inflation, and central bank actions will be essential for making informed investment decisions.

For more information on related investment opportunities and insights, please reference Economic Outlook 2026: Glass Half Full, featuring William Blair Macro Analyst Richard de Chazal.