PCE Inflation Forecast: TD Securities Predicts Alarming Re-acceleration into 2026

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PCE Inflation Forecast: TD Securities Predicts Alarming Re-acceleration into 2026

WASHINGTON, D.C. – April 2025. A new analysis from TD Securities delivers a stark warning for the U.S. economic horizon, forecasting that the core Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, is poised to re-accelerate through 2025 and into 2026. This pivotal PCE inflation forecast challenges prevailing market optimism and suggests a more complex and prolonged battle against price pressures lies ahead.

Decoding the PCE Inflation Forecast from TD Securities

TD Securities, a major global investment bank, bases its sobering outlook on a multi-factor analysis of persistent inflationary drivers. Their research team identifies several structural and cyclical forces converging to push prices higher once more. Consequently, this projection carries significant weight for policymakers and investors alike. The forecast specifically points to a reversal of the disinflationary trend witnessed in late 2023 and 2024, arguing that underlying pressures never fully dissipated.

Firstly, the labor market remains exceptionally tight, sustaining robust wage growth that feeds into services inflation—a component historically slow to cool. Secondly, geopolitical fragmentation continues to disrupt supply chains, elevating costs for imported goods and commodities. Furthermore, adaptive consumer and business inflation expectations may become entrenched, creating a self-fulfilling cycle. TD’s model suggests these factors will outweigh the deflationary impact from sectors like used cars and goods, leading to a measurable uptick in the year-over-year PCE inflation rate.

The Mechanics of Inflation Re-acceleration

Understanding why inflation might resurge requires examining its core components. The PCE index broadly measures the prices of goods and services consumed by individuals. Its “core” version, which excludes volatile food and energy prices, provides the clearest signal of underlying trend inflation.

TD Securities emphasizes that services inflation, which constitutes over 60% of the core PCE basket, is the primary concern. Key segments include:

• Housing/Shelter: Market rents have cooled, but this disinflation feeds into the official index with a significant lag, likely persisting into 2026.
• Healthcare: Rising insurance and medical care costs show little sign of abating.
• Other Services: Prices for dining out, personal care, and recreation continue to climb steadily.

Expert Analysis and Historical Context

This forecast aligns with historical patterns where inflation proves difficult to suppress permanently after a major shock. The post-pandemic period saw the highest inflation in four decades, driven by massive fiscal stimulus, supply chain ruptures, and a surge in demand. While aggressive Federal Reserve rate hikes successfully cooled the economy, history suggests the “last mile” back to the 2% target is often the most arduous. Economists frequently cite the 1970s as a cautionary tale, where premature policy easing allowed inflation to become entrenched, necessitating even more painful measures later.

TD’s analysis incorporates these lessons, warning that the current economic resilience—characterized by strong consumer spending and low unemployment—provides a fertile ground for prices to re-ignite. Their team references internal econometric models that factor in lagged effects of monetary policy, global energy price scenarios, and productivity trends. This evidence-based approach strengthens the forecast’s credibility within the financial community.

Implications for Federal Reserve Policy and Financial Markets

The potential for PCE inflation re-acceleration directly contradicts the market’s prevailing expectation of imminent Federal Reserve rate cuts. If TD Securities’ projection materializes, the Fed’s Federal Open Market Committee (FOMC) would face a profound dilemma. Policymakers might need to maintain a restrictive policy stance for far longer than currently anticipated, or even consider additional rate hikes. This scenario would dramatically alter the trajectory for:

• Interest Rates: Higher-for-longer benchmark rates.
• Bond Markets: Rising yields, particularly on longer-dated Treasury notes.
• Equity Valuations: Pressure on growth stocks sensitive to discount rates.
• The U.S. Dollar: Potential strengthening due to attractive yields.
• Consumer and Business Loans: Sustained high costs for mortgages, auto loans, and corporate credit.

Market participants closely monitor the PCE releases each month. A consistent pattern of upside surprises, as suggested by TD’s outlook, would trigger rapid repricing of assets globally. Therefore, investors are advised to scrutinize incoming data on employment, consumer spending, and sector-specific price indices for early warning signs.

Conclusion

The TD Securities forecast for U.S. PCE inflation to re-accelerate into 2026 serves as a critical counter-narrative to complacent market expectations. It underscores the persistent and multifaceted nature of modern inflationary pressures, particularly within the services sector. While not a certainty, this analysis highlights tangible risks that could force the Federal Reserve to delay or reverse its easing cycle, with significant consequences for economic growth and financial stability. Monitoring the monthly PCE data, alongside wage growth and services activity, will be paramount for validating or challenging this pivotal economic outlook through 2025 and beyond.

FAQs

Q1: What is the PCE price index, and why does the Fed prefer it?
The Personal Consumption Expenditures (PCE) price index measures the prices of goods and services consumed by households. The Federal Reserve prefers it over the Consumer Price Index (CPI) because it better accounts for changes in consumer spending patterns and has a broader scope of expenditures.

Q2: What does “core PCE” mean?
Core PCE excludes the volatile categories of food and energy prices. This provides a clearer view of the underlying, persistent trend in inflation, which is more relevant for setting long-term monetary policy.

Q3: How does TD Securities’ forecast differ from the Federal Reserve’s own projections?
As of early 2025, the median Fed projection (the “dot plot”) suggests a gradual return to the 2% target. TD Securities’ analysis is more pessimistic, forecasting a re-acceleration, implying the Fed may be underestimating persistent inflationary forces.

Q4: What are the main risks if PCE inflation does re-accelerate as forecast?
The primary risks include the Federal Reserve being forced to keep interest rates higher for longer, potentially triggering an economic slowdown or recession. It would also erode consumer purchasing power and create volatility across bond and stock markets.

Q5: What data should I watch to track this forecast?
Key indicators include the monthly Core PCE release from the Bureau of Economic Analysis, Average Hourly Earnings from the jobs report, the Services PMI from the Institute for Supply Management (ISM), and various surveys on consumer inflation expectations.

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