# Gapen expects core inflation to stay above target into 2027

Markdown copy of https://realalpha.app/s/gapen-expects-core-inflation-to-stay-above-target-into-2027/ on Real Alpha, the best minutes from long interviews with the people building AI. Cite and link the page, not this copy.

- Speaker: [Michael Gapen](https://realalpha.app/people/michael-gapen/) · Chief U.S. Economist, Morgan Stanley
- Host: [Ed Elson](https://realalpha.app/people/ed-elson/)
- Show: Prof G Markets
- Episode: [Microsoft Rises, Google Tanks: Why Investors Are Polarized On Big Tech](https://realalpha.app/v/hlS_LWOZsNU/), Oct 29, 2026
- Moment: 23:40 to 28:17 of the episode (5 min), playing on https://realalpha.app/s/gapen-expects-core-inflation-to-stay-above-target-into-2027/; the episode from there: https://realalpha.app/v/hlS_LWOZsNU/?t=1420

## Quote

> “core is probably a reasonable measure of where underlying inflation trends are that'll probably be **3.1 percent year on year**”
> — [Michael Gapen](https://realalpha.app/people/michael-gapen/) at [26:36](https://realalpha.app/v/hlS_LWOZsNU/?t=1596) · Prof G Markets

## Takeaways

1. Before tariffs and energy shocks, inflation was moving down, he says.
2. Core inflation could remain elevated through the first quarter of 2027.
3. Morgan Stanley expects rate hikes in December and March.

## About this segment

Michael Gapen says tariffs and energy shocks interrupted disinflation, not that the 2% target is unattainable. He forecasts core PCE near 3% through year-end and 2.6% by the end of next year.

From “Microsoft Rises, Google Tanks: Why Investors Are Polarized On Big Tech”, Oct 29, 2026. [Watch the full episode](https://realalpha.app/v/hlS_LWOZsNU/)

## Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

[23:53](https://realalpha.app/v/hlS_LWOZsNU/?t=1433) Something he also emphasized was this 2% target. He's like, I think he said, we doubled down on the 2% inflation target, which we have been quite a long way away from for several years now. I'm starting to think that that's just never going to happen. I'm starting to think we just live in a world where inflation is never close to the target because I just don't see, I mean, they keep on saying it.

[24:25](https://realalpha.app/v/hlS_LWOZsNU/?t=1465) I keep on knowing, yeah, there's two. percent thing. It's apparently important. But we've been miles off for years. So I guess my question to you, do you think that the two percent target is realistic, feasible? Do you take it seriously? I do on all three of those points. I would say if we go back to, you know, pre-Liberation Day tariff decisions, inflation was coming down. For example, in Europe, it did come all the way back down to the ecb's target it probably you know this is a counterfactual i cannot prove but inflation was decelerating if we did not get the tariffs if we did not get the conflict in the middle east that pushed up energy prices it may very well be the case that inflation would have gotten close enough down to two if not all the way to two so you know i think the fed was trying to

[25:19](https://realalpha.app/v/hlS_LWOZsNU/?t=1519) bring it back down to 2%. We just got additional supply shocks out of the Russia-Ukraine crisis, the conflict in the Middle East, and tariffs. But you raise a good point in that you've got a target. You say this is your target, and you say you're going to hit it. Actions have to speak. Words are important, but actions ultimately are most important. And that's where I think there was maybe some, say, conflict in the message today. If all of this is that important and that urgent and the economy is this strong, why did you wait? Again, I think you've got reasons why to wait, but we didn't necessarily hear those today. We're going to get the PCE data tomorrow.

[26:05](https://realalpha.app/v/hlS_LWOZsNU/?t=1565) Do you have any expectations for what we might see? And do you have any expectations for how inflation will fare over the next few months. I mean, it isn't seeming to get better and they haven't raised rates. So I'm not sure what to think about prices at this point. It seems like at least we're going to be looking at very high prices until the end of the year. But what do you think? So I think that's right, at least through the end of the year and probably even through say the first quarter of 2027 core inflation we'll focus on that because we know headline is being really driven by energy right now core is probably a reasonable measure of where underlying inflation trends are that'll probably be 3.1 percent year on year and we think it'll be around 3% by year-end, so a smidge lower.

[27:02](https://realalpha.app/v/hlS_LWOZsNU/?t=1622) And then you've got that usual feature of the economy where we get a lot of price increases in the first quarter, what economists call residual seasonality. In other words, there are many firms that raise prices once a year, and they do so early in the calendar year. But then after that, it's probably the case that inflation shows a clearer downward trend, not a lot. We think core PCE finishes next year at around 2.6.

[27:27](https://realalpha.app/v/hlS_LWOZsNU/?t=1647) So not all the way to the Fed's target, but directionally going towards the target. But you're right, it may be the case, it's likely to be the case, that inflation will be elevated and sticky, at least through the end of the first quarter. Now, alongside that, I do think the Fed will be raising rates further. We think they will raise rates again in December and then for a third time in March. I think you could argue maybe they should just get there in three consecutive meetings, but I think they can also get there by early next year, and that'll deliver more or less the same amount of restriction as we look into 2027 and 2028.