NewKerala.com

US Disinflation to Persist Into 2026, Paving Way for Fed Rate Cuts: SBI

A State Bank of India report projects that disinflation in the United States will continue into 2026. This trend is driven by a weakening labor market, stagnant household incomes, and fragile financial conditions. Key factors include a rising unemployment rate, contraction in business lending, and reduced fiscal stimulus from a narrower budget deficit. These combined pressures strengthen the case for the Federal Reserve to implement interest rate cuts.

Key Points: 7 Factors That May Push US Fed to Cut Rates in 2026: SBI Report

  • Rising US unemployment to 4.4%
  • Stagnant real disposable personal income
  • Negative commercial loan growth
  • Reduced federal budget deficit
  • Declining industrial capacity utilization
3 min read

Disinflation likely to persist in 2026, seven factors may push US Fed towards rate cuts: SBI report

SBI report says disinflation will persist into 2026 due to weak labor market, stagnant incomes, and fragile monetary conditions, compelling Fed rate cuts.

"Slack in labour market, stagnant real disposable incomes alongside reduced inflationary impact might lead to US Fed rate cuts - SBI Report"

New Delhi, February 5

Disinflation in the United States is expected to continue into 2026, driven by a combination of weak labour market trends, fragile monetary conditions, and slowing economic activity, according to a report by the State Bank of India.

The report highlighted seven key factors that could compel the US Federal Reserve to cut interest rates in the coming period.

It stated "Slack in labour market, stagnant real disposable incomes alongside reduced inflationary impact might lead to US Fed rate cuts".

First, the report pointed to increasing slack in the US labour market. The unemployment rate has risen steadily from an average of 3.6 per cent in 2023 to 4 per cent in 2024, and further to 4.4 per cent in December 2025.

In addition, the ratio of part-time to full-time household jobs in December 2025 compared to December 2024 has broadly remained unchanged. This suggests that full-time job creation has slowed, reflecting softer labour market conditions.

Second, real disposable personal income has remained largely stagnant. According to the report, real disposable income increased only marginally from USD 17,890 in January 2025 to USD 18,040 in December 2025.

This limited rise indicates that US consumers are entering 2026 with weak financial health, which could restrain consumption demand and reduce inflationary pressure.

Third, the report highlighted fragile monetary conditions in the US economy. The yearly growth of commercial and industrial loans has remained in negative territory throughout 2025. Persistent contraction in loan growth signals subdued business investment and tighter financial conditions.

Fourth, fiscal support has reduced significantly. The US federal budget deficit has narrowed from USD 2.7 trillion in 2021 to USD 1.7 trillion in 2025. The reduction in deficit spending implies lower fiscal stimulus, which may further dampen demand in the economy.

Fifth, capacity utilisation in the US has declined steadily. After peaking in 2022, capacity utilisation has been trending downward and stood at 76.26 per cent in December 2025. Lower capacity utilisation reflects weaker industrial activity and reduced pricing power for producers.

Sixth, the report noted the impact of tariffs on inflation. While tariffs are generally perceived as inflationary, Federal Reserve research suggests that higher tariffs can lead to lower economic activity and increased unemployment, which ultimately exert downward pressure on prices.

However, the research also cautioned that tariff hikes may increase uncertainty, weaken confidence, and trigger asset price declines.

Finally, the report highlighted the disinflationary effects of artificial intelligence. As companies increasingly shift from labour to AI, it is widely considered to be disinflationary. At the same time, AI adoption may put downward pressure on wages and prices, which could result in weaker economic growth.

Taken together, these factors suggest that disinflation is likely to persist in 2026, strengthening the case for potential rate cuts by the US Federal Reserve, the report added.

- ANI

Share this article:

Reader Comments

R
Rohit P
Interesting to see AI mentioned as a disinflationary force. It's a double-edged sword globally. While it may lower prices in the US, the job displacement it causes is a real concern. India's IT sector, which employs millions, needs to strategize for this shift.
A
Arun Y
Good analysis, but I respectfully think the report might be underestimating the resilience of the US consumer. Their economy has bounced back from worse. A rate cut could happen, but calling it for 2026 seems a bit premature. Let's see the data in the coming months.
S
Sarah B
The point about stagnant real income is key. If American consumers pull back, it affects global demand. As an exporter, India should watch this closely. Our manufacturing and services exports could face headwinds if US growth slows significantly.
K
Karthik V
SBI's research wing is doing a great job analyzing global trends. This is useful for our policymakers and investors. Lower US rates could eventually mean lower borrowing costs globally, which might help our infrastructure projects. A silver lining for us. 👍
M
Meera T
The link between tariffs and lower inflation is counter-intuitive but makes sense if it kills demand. Hope our trade negotiators are reading this! The global economic picture for 2026 looks complex. Jai Hind, and let's hope India's growth remains insulated.

We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.

Leave a Comment

Minimum 50 characters 0/50