The hottest U.S. inflation reading in more than three years did little to shift the consensus among economists ahead of next week's Federal Reserve meeting: hold rates, lean hawkish, and wait out the Iran-driven energy shock.
The May Consumer Price Index rose 0.5% on the month and accelerated to 4.2% year-over-year, the highest since April 2023, as the Strait of Hormuz shock fed through to energy prices. Core CPI ticked up to 2.9% on a tamer 0.2% monthly gain. Both readings matched expectations.
What The Market Is Pricing For The Fed
CME FedWatch tool data implies roughly a 98% probability the Fed holds its target range on June 17, though futures now price a 25-basis-point hike by December. On Polymarket, the odds of at least one 2026 rate hike sit near 52%.
Iran War Drove May Inflation Higher
Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, called the Iran War and higher energy prices the big factor pushing up inflation. Core CPI “behaved better” but is “still too fast for the Fed,” he said. Adams expects a hold at incoming Chair Kevin Warsh's first meeting, with the Dot Plot likely signaling more members see an eventual hike as their next move.
Jeffrey Roach, chief economist at LPL Financial, said core inflation's 0.2% monthly gain kept the annual rate below the psychologically important 3% level. He flagged rising medical care and transportation costs and warned that if the disruption in the Strait of Hormuz lasts through Labor Day, the energy shock could spread and upend rate expectations. He sees the Fed holding while dropping any easing bias.
Stephen Juneau, economist at Bank of America Global Research, revised the firm's core PCE tracking estimate up to 0.27% month-over-month after factoring in a likely jump in portfolio management fees tied to equity gains. Despite softer core goods, Juneau sees the Fed firmly on hold, with risks skewed toward higher front-end rates.
Peter Williams of 22V Research called the soft topline “a bit of a head fake,” noting core services excluding housing accelerated to 3.7%. He expects the Fed's core PCE forecast for 2026 to be revised up to around 3.1%, leaving little underlying comfort in the report.
Fed Rate Decision: What To Expect Next Week
The takeaway across desks: the data doesn't justify a cut but doesn't yet force a hike. Economists expect a hold on June 17 and a more hawkish Dot Plot, with the Strait of Hormuz the key wild card.
The SPDR S&P 500 ETF Trust (SPY) was down 1.3% on Wednesday, heading for the second straight negative session. Since last week's record levels of 7,620 points, the benchmark has fallen by over 4%.
