MS Goodbye disinflation, hello oil risk premium

M September 18, 2026 05:00 AM GMT

US Economics Weekly | North America Morgan Stanley & Co. LLC Idea

Michael T Gapen Chief US Economist

Goodbye disinflation, hello oil

Economist We now expect two more hikes from the Fed, and our Arunima Sinha Global Economist commodity analysts see energy markets facing a convergence of

supply chain disruptions. A higher expected path for oil prices Heather Berger Economist means disinflation will be slower, and more restrictive policy

also weighs on growth in 2027. Lingdi Xu Economist

Key Takeaways Persistently higher oil prices likely mean second-round effects on inflation. We now expect core PCE inflation to end 2026 at 3.2% (4Q/4Q) and 2027 at 2.7%.

Inflation weighs on purchasing power and rates add more pressure. Wealth supports the high end. We expect '27 real consumption at 1.8% (4Q/4Q) vs 2.1% before.

The recovery in non-AI related business investment is delayed; we revise lower nonresidential fixed investment growth to 7.1% in '27.

The economy is still resilient. We expect '27 real GDP at 2.3% vs. 2.6% before. We trim '27 payroll growth to 50k/month, bringing the unemployment rate to 4.3%.

We expect two more 25bp hikes from the Fed in December and March, to a target range of 4.25-4.50%,. They hold there through the end of next year, in our forecast.

Exhibit 1: Energy prices have moved higher in recent months, shifting our outlook into an oil risk-premium baseline

Spot Prices, Dollars Per Barrel 250 Brent - Europe WTI - Cushing Oklahoma Diesel Regular Gasoline 225

50 1/2 2/2 3/2 4/2 5/2 6/2 7/2 8/2 9/2

Source: Energy Information Administration, Haver Analytics, Morgan Stanley Research

For important disclosures, refer to the Disclosure Section, located at the end of this report.

Goodbye disinflation, hello oil risk premium

We make several changes to our outlook for the US economy this week. First, we revise modestly higher our inflation forecast through the end of 2027 on account of recent trends and persistently higher energy prices. Inflation is stickier: it still decelerates, but more slowly than before. Second, we nudge lower our outlook for growth in 2027 and marginally soften our outlook for the labor market. Stickier inflation and tighter financial conditions mean less broadening out of the expansion. Third, we pencil in two additional 25bp rate hikes from the Fed in December and March, bringing the target range for the federal funds rate to 4.25-4.50%, which we expect to remain in place through the end of next year. These changes shift us away from our previous disinflation outlook into an "oil risk premium" baseline. We adjust the probabilities of our alternative scenarios accordingly (see Exhibit 31 for more on the alternative scenarios).

Moving away from benign de-escalation

Our mid-year update to our outlook for the US economy assumed a benign de-escalation scenario in the Middle East conflict. Along with payback from tariffs and other forces, a resumption of lower oil prices would help inflation decelerate, broaden the expansion, and keep the Fed on the sidelines. Our commodity analysts see global energy markets as facing an unusual convergence of supply chain disruptions, from constrained Middle East export routes and pipeline outages to bottlenecks in major shipping corridors. At the same time, tight tanker capacity, refinery disruptions, and low European fuel inventories have pushed transportation costs and diesel margins to record highs. The energy market previously absorbed these shocks through strong US exports, weaker Chinese demand, and ample inventories, but those buffers are now seen as fading, leaving oil prices increasingly vulnerable to further geopolitical disruptions (see Everything Everywhere All at Once). If so, then we are hard-pressed to see a resolution to energy price pressures anytime soon and incorporate features of a higher oil risk-premium into the baseline.