“Bust or boom?” That’s the central question in UBS’ outlook for the U.S. economy between 2026 and 2028. Beyond that, the team led by economist Jonathan Pingle takes aim at a major concern economists have repeatedly flagged throughout 2025: the current tariff landscape effectively functions as a large-scale tax hike. Their analysis shows the policy is slowing growth while contributing to stubborn inflation that chips away at real income gains.
“The tariffs are a big tax increase,” the report notes. UBS calculates that today’s trade policies imply a weighted-average tariff rate of 13.6% using 2024 import shares—up from just 2.5% at the start of the year. That jump equates to a tax on imports worth about 1.2% of GDP.
Tariffs Push Prices Higher
The most immediate effect is visible in inflation. UBS estimates the policy shift will add 0.8 percentage points to core PCE inflation in 2026. That alone could undo a full year of disinflation progress and keep inflation hovering near 3.5% even if pressures in sectors like housing or energy cool.
Through 2028, the direct impact climbs to roughly 1.4 percentage points on the level of core PCE. Once ripple effects—like supply chains rerouting and protected domestic industries raising prices—are included, the figure approaches 1.9 points. In short, tariffs could be responsible for nearly two-thirds of the remaining gap between current inflation and the Federal Reserve’s 2% target.
Household Pressure Builds
Higher prices are hitting families at a time when wage growth is slowing. Average hourly earnings have cooled to around 3.5% annualized over the last half-year, and aggregate payroll income is running near 3.25%. Upcoming quarterly PCE inflation readings are expected between 3% and 4%, effectively wiping out those gains.
UBS emphasizes that many households are less financially resilient than they were two years ago. Wealth effects from the stock market are helping upper-income groups, but those below the top 20% of earners have historically low levels of liquid savings. With a moderating labor market, confidence about the future is slipping.
This vulnerability matters because the current expansion is described as both precarious and unusually narrow. According to the forecast, growth is heavily concentrated in AI-related business investment and consumption driven by equity-market wealth.
“Parts of the U.S. economy are in recession,” UBS states, pointing specifically to real residential investment and several non-residential construction categories.
Promises of a “Tariff Dividend”
As the inflation challenge intensifies, President Donald Trump continues to champion tariffs as a tool for protecting U.S. industry. He’s suggested a new benefit for households as well: a “tariff dividend” of “at least $2,000 a person (not including high-income people!),” arguing that ballooning trade-tax revenue is large enough to fund such checks.
The raw figures are sizable. Tariff revenue reached $195 billion in fiscal 2025, up from $77 billion the year prior. The Committee for a Responsible Federal Budget projects that broader “reciprocal tariffs” could raise $1.3 trillion by 2029 and $2.8 trillion by 2034—nearly doubling tariffs’ share of federal receipts to around 5%. That’s akin to a new payroll tax or a significant cut to defense spending.
But analysts say the math doesn’t add up. John Ricco at Yale’s Budget Lab calculates that a $2,000 payment for every American would cost roughly $600 billion, far exceeding expected tariff revenue. Treasury Secretary Scott Bessent has also signaled hesitation, suggesting any rebate might instead emerge as future tax relief.
A Policy Loop With Economic Risks
Economists broadly warn that tariff revenue ultimately comes from consumers: importers raise prices to offset the tax burden, turning tariffs into a regressive cost for households.
UBS argues that a feedback loop is emerging. Tariffs aimed at rebuilding industrial strength are now:
• Driving inflation higher
• Reducing real purchasing power
• Undermining consumer demand
The result, they say, is a “narrow expansion” that may be even more constrained than it appears—one reliant on AI-focused investment and trade-tax flows rather than strong, broad-based household spending.
