Is it ethical to cite a reviewer's papers even if they are rather irrelevant?
Don't speculate about who the reviewer(s) of your manuscript are. Nothing good can come out of having the knowledge. In fact thinking you know who the reviewers are can cause you quite a bit of grief.
Forget about who authored the review and focus on the facts. You think the paper suggested is tangentially related and not really relevant. Therefore you think you shouldn't cite it. As in similar situations, the next most natural thing to do would be to not cite it, giving your reasons. It would take a pretty unscrupulous reviewer to reject your manuscript because it doesn't cite his paper, and even if the reviewer attempts this, he would also have to convince the editor that he's actually rejecting your manuscript for valid reasons. Remember the editor can see who the reviewer is, and will notice if the reviewer is pushing his paper even if the relevance is tangential. Further, remember that the editor can accept a paper even if the reviewer recommends rejection.
Finally, about whether to report this, there's no point. You won't learn anything about it anyway because the editors can neither confirm nor deny the identity of the reviewer.
[The reviewer suggests] some past work which may be useful --- one of which I recognized as this researcher's work... I have not reached out to this researcher, nor have I shared my suspicions with any co-authors. ... Is this something that should be reported to the PC?
Let's assume that you're right that this recommended paper was written by the reviewer --- so what?
There is nothing unethical about a reviewer recommending citation of his own paper, so long as he believes that work is relevant to the topic. Indeed, reviewers are often selected precisely because they have published papers in the field they are reviewing, so it is common for reviewers to be aware of work they have published that bears on the research they are reviewing. It is therefore quite natural that a reviewer will be aware of some piece of work they have written that bears on the topic they are reviewing. If this is the case then it is quite reasonable for them to recommend citation of that paper.
You say that this paper was just one work embedded within a broader set of past works. By your own description, this work is "tangentially related" to your paper. Whether you decide to cite the recommended paper therefore depends on the desired scope of the literature discussion in your own paper ---i.e., the degree to which you wish to relate your own work to parts of the literature that are only tangential to your work. Whatever your judgment here, there is room for reasonable people to disagree on the proper scope for references to other works, so it is entirely reasonable for the reviewer to recommend the paper in his list of past works.
While the paper this researcher authored is tangentially related, it is not one that I would consider particularly relevant in our discussion. However, being quite certain of this reviewer's identity, it is tempting to "play up" the relevance of that paper in the hopes of swaying the reviewer. ... Is this ethical?
Just write your paper the way you think is best --- if you think the recommended paper is tangentially relevant then you can mention it if you want, and if you think that is too much of a stretch, and you'd prefer not to mention it, then say that in your response. Reviewer recommendations are not mandatory, and if you decide not to follow the recommendation to cite that particular paper, that is up to you. There is no reason to try to pander to the (suspected) reviewer.
Bonus question: Is this something that should be reported to the PC?
Sigh --- this is the kind of question that really makes me despair for academia. Here we have a story of an outside academic acting as an unpaid journal reviewer, who has taken time away from other duties to do work reviewing your paper. Among a list of potentially useful past work he has provided to you, he has mentioned one paper that you think is probably his, which even you concede is "tangentially related" to your own work. Rather than expressing thank for the time this reviewer has taken to provide you with a list of related works, your instinct is to have "suspicions", and you want to know whether to narc on him for the "unethical" conduct of having mentioned potentially relevant research.
I share the instinct to be a tiny bit wary of the situation. Namely that it is, at the very least, plausible that the motivation for suggesting citing the paper is to increase the citation count of that paper, not because it helps your own. From a step back, it would clearly be better to avoid that from being a factor.
However:
It would be very hard to completely remove this possibility (even some kind of meta-review would eventually be subject to the same issues).
The question is about your behaviour. It is a failing of the system if following a suggestion to improve your chance of publication is a conflict of interest.
Absolute worst case: citation figures change by one, in a borderline case.
I don't think there is any cause to lose sleep over this.