Inflation "nuclear bomb" detonates tonight! Will the US CPI hit its highest in nearly three years?

At 8:30 PM Beijing Time tonight, investors in the global financial markets may face the “most dangerous” set of U.S. macroeconomic data releases since the U.S.-Iran conflict—specifically, the upcoming April U.S. CPI data expected to show the highest inflation rate in nearly three years. This will pose a severe challenge for investors and Federal Reserve officials alike.

According to median forecasts from media surveys of economists, the U.S. Consumer Price Index (CPI) for April is expected to increase by 3.7% year-over-year, up from the previous 3.3%. This is mainly due to the ongoing impact of the oil crisis on consumer prices, with the month-over-month CPI also expected to rise sharply by 0.6%.

If the forecasts are accurate, this will be the highest overall CPI year-over-year increase since early fall 2023. Excluding energy and food prices, the so-called core CPI is also projected to rise to 2.7%, reaching a new high since September last year, with a monthly increase of 0.3%.

Below is a summary of industry estimates for the month-over-month CPI increase for April. As shown in the chart, the forecast range from institutions generally falls between a 0.4% and 0.8% rise.

From “de-inflation” to “2022 overheating mode”?

Jordi Visser, head of AI Macro Nexus research at 22V Research, pointed out that this report “may not just confirm yet another unsettling inflation data.” He believes that the trend over the past two months looks more like a replay of the 2022 inflation surge rather than the market’s previously steadfast “de-inflation” narrative.

In fact, the market has previously tended to view the current price surge as a temporary event triggered by the Iran war. Although derivatives contracts used to hedge inflation risks have reached their highest levels since October 2025, their performance remains relatively restrained. Futures traders generally expect Federal Reserve officials to choose to “stand by” before the inflation storm passes.

However, a “hot” CPI report could completely change expectations. Although U.S. inflation has been slowly approaching the Fed’s 2% target in recent years, the Middle East conflict has undoubtedly altered this situation, with even core prices excluding food and energy beginning to rise again.

Visser pointed out that the continued rise in transportation and warehousing indices indicates that price shocks are spreading from the energy sector. “Oil isn’t everything, but it’s the main reason for the worsening situation. And the Strait of Hormuz is still closed,” he said. “This isn’t some fleeting inflation scare. When transportation, storage, and replenishment costs all become expensive at the same time, this is what it looks like now.”

From the most straightforward perspective, further CPI increases are likely driven by soaring energy costs. According to data from the American Automobile Association (AAA), as of this Monday, the national average gasoline price was $4.52 per gallon, up about 44% from the same period last year.

The impact of rising fuel prices may also extend to travel: data from Kayak shows that during the week of April 27, the average domestic airfare was $365, higher than the $346 at the start of the war. International ticket prices increased even more, rising from $805 in early March to about $1,100 in the latest data.

Meanwhile, with diesel prices soaring, rising energy bills could eventually lead to higher food prices in the U.S., although the most obvious impact on grocery prices might take some time to materialize.

“The ongoing conflict in the Middle East keeps energy prices high, which will begin to have more noticeable spillover effects on inflation in other sectors,” wrote economists led by Tom Porcelli, Chief U.S. Economist at Wells Fargo Securities, in a commentary.

Tonight’s report is also expected to show that the core inflation rate, excluding volatile food and energy prices, rose 2.7% year-over-year. This would be higher than March’s 2.6%, reaching a new high since September last year. Economists generally believe that core prices better reflect inflation trends than the overall CPI, as food and gasoline prices can fluctuate due to weather and other non-inflationary factors.

Sticky inflation pressures mainly stem from consumer goods constrained by supply chain bottlenecks, such as storage chips and CPUs. The upward price pressure on computers and peripherals is expected to remain difficult to ease this year.

It is worth noting that April’s CPI data may also include one-time special factors that could further boost the core inflation reading. This factor stems from adjustments to the CPI index for rent and owner’s equivalent rent after a data gap caused by the government shutdown last fall. Barclays stated that this adjustment could temporarily boost core inflation by about 0.1 percentage points, while Goldman Sachs estimates a 0.5 percentage point increase for the owner’s equivalent rent component.

Goldman Sachs: Key points to watch in tonight’s CPI report

In its preview of the CPI, Goldman Sachs expects April’s core CPI to rise by 0.31% (rounded to the market consensus of 0.3%), and to increase by 2.67% year-over-year (matching the consensus of 2.7%). Meanwhile, the overall CPI is expected to rise by 0.58% (in line with the consensus of 0.6%), mainly driven by a 0.3% increase in food prices and a 4.6% surge in energy prices, primarily reflecting retail gasoline price increases since the Iran war outbreak. The overall CPI is projected to rise 3.68% YoY (matching the consensus of 3.7%).

Goldman also listed four key trend points expected to appear in this week’s report:

① Housing. The firm expects a one-time sharp acceleration in housing prices—owner’s equivalent rent (OER) to increase by 0.50%, and rent prices by 0.44%—reflecting the fading of downward index bias caused by the government shutdown’s data collection gap. Due to the six-month rotation sample structure, the sample that should have been surveyed in October will be sampled in April. For this group, data in April 2026 will essentially reflect two months’ worth of increases, as the prices in April 2026 will be compared to those in April 2025.

② Travel services. Goldman expects a significant rise in travel service inflation this month, partly reflecting the transmission of oil price increases since the Iran war outbreak. The bank forecasts a 3% increase in airline ticket prices—mainly driven by a sharp rise in jet fuel prices—while hotel prices are expected to remain unchanged, reflecting signals from substitute price data.

③ Automobiles. Goldman expects mixed movements in auto inflation: used car prices are expected to decline by 0.4% based on auction signals, while new car prices are expected to rise by 0.1%, reflecting a slight reduction in new vehicle sales incentives; auto insurance prices are expected to increase by 0.4%, reflecting higher premiums.

④ Health insurance. The April CPI report will include a semiannual update for health insurance components. This update is expected to cause a continued significant monthly decline of about 1.5% in health insurance in the next six data points. Since health insurance in the PCE index uses different data sources, it is unlikely to significantly impact PCE inflation.

Goldman also noted that other parts of the report are expected to show tariffs exerting upward pressure on affected categories (such as leisure and entertainment), which could raise the April core inflation rate by 0.04 percentage points. Their forecast aligns with a slight 0.26% month-over-month increase in core PCE, reflecting the relatively low weight of rent and OER in the index.

Looking ahead, tariffs are expected to continue modestly boosting monthly inflation in the coming months. Elevated oil prices will keep energy prices high for consumers, further pushing up core inflation. Goldman projects that the core CPI month-over-month increase will be around 0.2% in the coming months, but if oil market volatility and related price increases persist longer than expected, inflation risks will tilt upward.

How will the most anticipated inflation data impact the markets?

At the April Federal Reserve meeting, three dissenting regional Fed presidents (Harker, Kashkari, and Logan) voted against including any dovish language in the statement, believing inflation risks are sufficiently high and that the Fed should keep all options open—including maintaining rates longer or even raising them—rather than signaling easing.

Some analysts see this as a signal to incoming Chair Kevin W. Waller, who previously supported rate cuts and tightening the balance sheet. Another key change in the April statement was the inflation wording, where “inflation remains at a relatively high level” was replaced with “at a high level,” attributing this to recent global energy price surges. This subtle shift is viewed as hawkish.

From a policy perspective, Jordi Visser of 22V Research believes the Fed is in an “extremely delicate position.” On one hand, high inflation and a robust labor market point toward possible rate hikes; on the other, the U.S. fiscal situation (debt issues) is worsening.

He said, “This is no longer a textbook fight between the Fed and inflation, but a game of controlling inflation, debt repayment pressures, and political demands for easing.” He added that Waller’s willingness to cut rates might bring a period of inflationary economic boom before year-end. Meanwhile, markets must also guard against another possibility: if Waller cannot push through easing, the Fed may be forced to hike rates.

Bank of America’s U.S. Rates Strategist, Mark Cabana, noted in a report that the last rate hike cycle—post-pandemic inflation surge—caused the S&P 500 to fall 25%, and this scenario could repeat.

He added that markets are currently underestimating the risk of rate hikes. “Compared to post-pandemic, any actual rate increases by the Fed now could be much smaller,” Cabana wrote. “In any case, we are concerned that if the Fed hikes to cool the economy and slow growth, risk assets could react negatively.”

Below are J.P. Morgan’s market outlook estimates for tonight’s different CPI scenarios, focusing on core month-over-month data and S&P 500 daily volatility:

5.0% probability: Core CPI MoM increase above 0.45%; S&P 500 down 1.25% to 2.0%;

25.0% probability: Core CPI MoM increase between 0.40% and 0.45%; S&P 500 down 0.25% to 1.0%;

40.0% probability: Core CPI MoM increase between 0.35% and 0.40%; S&P 500 fluctuating within ±0.50%;

25.0% probability: Core CPI MoM increase between 0.30% and 0.35%; S&P 500 up 0.75% to 1.25%;

5.0% probability: Core CPI MoM below 0.30%; S&P 500 up 1.0% to 1.5%;

J.P. Morgan’s team noted, “While the current focus is on the energy price shocks from the Strait of Hormuz, given the closer link between core inflation, the dollar’s movement, and bond yields, we believe markets will pay more attention to core inflation. Moreover, since the Fed has characterized energy price shocks as temporary, this further intensifies market focus on core inflation.”

J.P. Morgan also pointed out that overall inflation, with April’s average retail gasoline price possibly rising 11.6% MoM, could push overall CPI MoM above 0.5%. Regarding core inflation, recent real-time data on housing and used cars suggest some segments of core inflation may offset the rising costs in other parts of the core CPI basket. Looking ahead, as companies begin to pass on costs or add fuel surcharges, monitoring inflation trends will be crucial. In other words, the current rising inflation data may be manageable, but if inflation accelerates again by June, bond markets could react negatively, with yields rising.

(Article source: Cailian Press)