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

China Financial News (CFN) May 12 (Editor: Xiaoxiang) Tonight at 8:30 p.m. Beijing time, investors across the global financial markets may be presented with the “most perilous” set of U.S. macroeconomic data releases since the U.S.-Iran conflict. The U.S. April CPI data expected to be published on Tuesday is anticipated to show that the pace of price growth has reached the highest level in nearly three years. This will be a severe challenge for both investors and Federal Reserve officials.

Based on the median estimates of economists surveyed by the media, the year-over-year increase in the U.S. Consumer Price Index (CPI) in April is expected to reach 3.7%, up from the prior 3.3% reading. This is mainly because the ongoing oil crisis continues to hit the consumer side. The month-over-month CPI increase in April is also expected to rise significantly to 0.6%.

If the forecast is accurate, this would represent the highest overall year-over-year CPI increase since early fall 2023. After excluding energy and food prices, the so-called core CPI increase is also expected to rise to 2.7%, reaching a new high since September last year, with a month-over-month increase of 0.3%.

Below is a consolidated summary of industry institutions’ estimates for the April month-over-month CPI increase. As shown in the chart, the institutions’ overall forecast range is broadly between 0.4% and 0.8%.

US500 +0.19% CL +2.6% TNX +1.05%

S&P 500 Index

Follow

Analysis US500

Included in our AI-selected strategy

·

View strategy details

7,412.84

▲ +13.91 (+0.19%)

Close · 03:59:59

1 day

1 week

1 month

6 months

1 year

5 years

Maximum

Created with Highcharts 11.4.8 14:00 15:00 16:00 17:00 18:00 19:00 7390 7400 7410 7420

Contents

US500 +0.19% CL +2.6% TNX +1.05%

Analysis US500

From “disinflation” to a “2022 fever mode”?

Jordi Visser, Head of AI Macro Nexus research at 22V Research, noted that this report “may not just be confirming another unsettling inflation data point.” He believes that the trend over the past two months looks more like a replay of the 2022 inflation blowout than the “disinflation” narrative that the market has long believed.

In fact, the market had previously tended to treat the current surge in prices as a temporary event triggered by the Iran war. Although derivative contracts used to hedge inflation risks have reached the highest level since October 2025, their performance remains relatively restrained. Futures traders generally expect Federal Reserve officials to “sit on the sidelines” before the inflation storm passes.

However, an “overheated” CPI report could completely change expectations. Previously, even though U.S. inflation in recent years had been inching closer to the Fed’s 2% target, the Middle East conflict has undeniably altered that picture—pushing even core prices excluding food and energy back into an upswing.

Visser pointed out that the continued rise in the transportation and warehousing index indicates that price shocks are spreading from the energy sector. “Oil is not everything, but it is the main driver of the deterioration of the situation. And the Strait of Hormuz is still not open,” he said. “This doesn’t look like a fleeting inflation scare. When transportation, storage, and replenishment costs all become expensive at the same time, this is what it looks like right now.”

At the most intuitive level, further CPI increases are likely driven by soaring energy costs. According to data from the American Automobile Association (AAA), as of this Monday, the nationwide average gasoline price in the U.S. is $4.52 per gallon, up about 44% from the same period last year.

The rise in fuel prices may also spill over into travel. According to Kayak, during the week of April 27, the average domestic airfare in the U.S. was $365, higher than $346 in the early days of the outbreak of the war. International airfare prices rose even more: from $805 in early March to about $1,100 in the latest available data.

Meanwhile, as diesel prices soar, higher energy bills could eventually lead to higher U.S. food prices, although the most obvious impact on food grocery prices may take some time to be felt.

“Persistent conflict in the Middle East keeps energy prices high, and this will begin to have more obvious spillover effects on inflation in other areas,” wrote economists led by Tom Porcelli, Chief Economist at Wells Fargo Securities, in a commentary.

The report tonight is also expected to show that core inflation—excluding volatile food and energy prices—will rise 2.7% year-over-year. This would be higher than March’s 2.6% and set a new high since last September. Economists broadly believe that core prices reflect the inflation trajectory better than the headline CPI index, because food and gasoline prices may move up and down due to factors such as weather that are unrelated to inflation.

Sticky inflation pressures mainly come from consumer goods constrained by supply chain bottlenecks, such as storage chips, CPUs, and similar categories. The expected upward pressure on the prices of computers and related peripherals this year may be difficult to relieve.

What’s worth paying attention to is that the April CPI data also includes one-off special factors that will further push up the core inflation reading. This factor comes from adjustments to the CPI for imputed rent and owner’s equivalent rent following a data gap caused by last autumn’s government shutdown. Barclays said the adjustment could temporarily boost core inflation by about 0.1 percentage points, while Goldman Sachs expects the owner’s equivalent rent component to bring a 0.5 percentage point increase.

Goldman Sachs: Key takeaways in tonight’s CPI report

In its CPI forward-looking report, Goldman Sachs said it expects April core CPI to rise 0.31% (rounded to 0.3% in line with the market’s general consensus), and to increase 2.67% year-over-year (matching the market consensus of 2.7%). At the same time, Goldman Sachs expects headline CPI to rise 0.58% (in line with the market’s general consensus of 0.6%), mainly driven by higher food prices (+0.3%) and a sharp increase in energy prices (+4.6%). The energy price rise mainly reflects the increase in retail gasoline prices since the outbreak of the Iran war. Headline CPI is projected to rise 3.68% year-over-year (in line with the market consensus of 3.7%).

Goldman Sachs also listed four key sub-trends it expects to appear in this week’s report:

① Housing. Housing-category prices are expected to show a one-time sharp acceleration—owner’s equivalent rent (OER) up 0.50%, rent up 0.44%—which reflects the fading of the downward bias in the index level caused by the failure to collect data during the government shutdown. Because of the six-month rotating sample structure, the sample group that should have been sampled in October—where price data was imputed as zero because the Bureau of Labor Statistics was unable to collect price data during the shutdown—will be sampled in April. For this sample group, the April 2026 data will essentially reflect two months of increases, because the April 2026 prices will be compared against the April 2025 prices.

② Travel services. Goldman Sachs expects travel services inflation this month to rise significantly, partly reflecting the pass-through effects of higher oil prices since the outbreak of the Iran war. The firm forecasts that airfare prices will rise by 3%—driven mainly by the sharp increase in aviation fuel prices—while hotel prices are expected to remain unchanged, reflecting signals from substitute-price data.

③ Automobiles. Goldman Sachs expects auto inflation to show mixed movements: based on signals from used car auction prices, used car prices are expected to fall 0.4%; new car prices are expected to rise 0.1%, reflecting a small decrease in incentives for new car sales; and auto insurance prices are expected to rise 0.4%, reflecting higher premiums.

④ Health insurance. The April CPI report will include a semiannual data update for the health insurance component. This update is expected to result in continued large month-over-month declines of about 1.5% for the health insurance component over the next six periods. Because health insurance uses different data sources in the PCE index, it is unlikely to affect PCE inflation.

Goldman Sachs said other parts of the report are expected to show that tariffs will create upward pressure on the more affected categories (such as leisure and entertainment), which would push the April core inflation rate up by 0.04 percentage points. The firm’s forecast is consistent with an expectation of a marginal 0.26% month-over-month increase in core PCE in April, reflecting the relatively low weights of rent and OER in the index.

Looking ahead, tariffs should continue to modestly boost monthly inflation over the coming months. High oil prices will keep consumer energy prices elevated, thereby pushing up core inflation. Goldman Sachs expects that in the coming months the core CPI month-over-month increase will be around 0.2%, but if oil market turmoil and related oil price increases persist longer than expected, inflation risks will skew upward.

How will the most closely watched inflation data impact the market?

At the April Federal Reserve meeting, three dissenting regional Federal Reserve presidents (Harker, Kashkari, and Logan) voted against adding any dovish tilt in the statement. They believed inflation risks are already high enough and that the Fed should keep all options open, including maintaining interest rates unchanged for a longer time and even raising rates, rather than signaling easing.

Some analysts believe this could be a signal to the incoming Chair, Kevin W. Waller, who previously supported rate cuts and tightening balance sheet policies. Another key change in the April statement also lies in the inflation wording: the phrase “inflation levels remain at relatively high levels” was replaced with “at a high level,” and the Fed attributed this to the recent surge in global energy prices. This subtle adjustment is viewed as leaning hawkish.

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

He believes, “This is no longer a textbook standoff between the Fed and inflation, but rather a game between controlling inflation, managing debt-servicing pressure, and political pressure calling for easing.” He added that Waller’s willingness to cut rates could bring a period of inflationary economic prosperity before the end of the year. At the same time, the market also needs to guard against another possibility: if Waller cannot carry out his easing agenda, the Fed may be forced to raise rates.

Mark Cabana, Bank of America’s U.S. interest rate strategist, said in a report that the previous rate-hike cycle—when inflation surged in the post-pandemic period—caused the S&P 500 index to drop 25%, and that this scenario could be repeated now.

He added that the market is currently underestimating the risk of rate hikes. “Compared with the post-pandemic period, any actual rate hikes by the Fed now would likely be much smaller,” Cabana wrote. “In any case, we worry that if the Fed raises rates with the aim of cooling the economy and slowing growth, risk assets could react negatively.”

Below are J.P. Morgan’s market forecasts for different CPI scenarios tonight. The firm focuses on the core month-over-month data and the single-day volatility of the S&P 500 index:

5.0% probability: core CPI month-over-month increase above 0.45%; S&P 500 down 1.25% to 2.0%;

25.0% probability: core CPI month-over-month increase between 0.40% and 0.45%; S&P 500 down 0.25% to 1.0%;

40.0% probability: core CPI month-over-month increase between 0.35% and 0.40%; the S&P 500 trades within a range of no more than ±0.50%;

25.0% probability: core CPI month-over-month increase between 0.30% and 0.35%; S&P 500 up 0.75% to 1.25%;

5.0% probability: core CPI month-over-month increase below 0.30%; S&P 500 up 1.0% to 1.5%;

J.P. Morgan’s team noted, “Although the current focus is on the energy price shock caused by the Strait of Hormuz, given that core inflation is more closely associated with the dollar’s trajectory and bond yields, we believe the market will pay more attention to core inflation. In addition, given that the Fed has indicated that energy price shocks are temporary, this further intensifies the market’s focus on core inflation.”

J.P. Morgan said on overall inflation that April’s average gasoline retail price could rise 11.6% month-over-month, pushing the headline CPI month-over-month increase to 0.5% or higher. Turning back to core inflation, recent real-time data on housing and used cars suggest that some sub-segments of core inflation may offset part of the impact of rising input costs elsewhere in the core CPI basket. Looking forward, it is crucial to closely monitor the inflation trend as companies begin to pass through costs or implement fuel surcharges. In other words, the market can ignore rising inflation data for now, but if inflation continues accelerating upward again in June, we believe the bond market will show a negative reaction, such as higher yields.