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The US inflation storm is not over! Morgan Stanley warns that peaks will occur in May and June, expecting the Federal Reserve to remain on hold this year

Data released this week shows that inflation in April exceeded expectations, this "inflation nuclear bomb" almost completely shattered the Fed's rate cut expectations and temporarily suppressed risk appetite among US stock investors. However, the worst phase of inflation may still be ahead.

According to Morgan Stanley, US inflation may peak in the next two months.

Morgan Stanley's Chief US Economist Michael Gapen pointed out that due to multiple factors such as tariffs, the Iran war, and persistently lagging housing inflation data, rising inflation is expected to peak sometime in May or June. These factors will collectively push prices higher as summer approaches.

In a recent media interview, Gapen stated that he believes the US is currently experiencing an "inflation pressure peak." He added that the actual peak in annual price growth might occur in the coming months.

The Three Main Drivers

Tariff factors: Gapen said that the last wave of inflation caused by President Trump's tariff policies is now transmitting into core prices. He pointed out that prices for goods like clothing are rising. Excluding volatile food and energy prices, core inflation has accelerated from 2.6% in March to 2.8% in April.

Energy prices: Since the outbreak of the Iran war, oil prices have surged significantly, which is the main factor driving April's energy inflation. The latest Consumer Price Index (CPI) shows that energy prices in April soared by 17.9 year-over-year, accounting for about 40% of overall inflation, with gasoline prices jumping 28.4% YoY.

Lagging housing inflation effects: Gapen mentioned that due to the federal government shutdown last fall, housing cost inflation has a lagging effect because data collection was interrupted during the shutdown. He described the recent acceleration in housing prices as a "catch-up" effect.

According to the latest CPI report, housing inflation in April rose to 0.6%, double the growth rate of the previous month.

The Fed is expected to stay on hold this year

Currently, inflation faces "triple pressures," and the Fed is expected to remain on hold this year. According to the US Bureau of Labor Statistics, the Consumer Price Index (CPI) in April increased by 3.8% year-over-year, the highest since May 2023.

As inflation continues to rise, the market has largely ruled out the possibility of rate cuts by the Fed this year. According to CME's FedWatch tool, the market is currently pricing in only a 1% chance of a rate cut in 2026, down from 31% a month ago.

Notably, traders on prediction market platforms believe that the inflation peak has not yet arrived. Traders on the Kalshi platform believe that the price increase in 2026 will almost certainly surpass 4%, and they see nearly a 66% chance of exceeding 4.5%. Traders also believe that there is nearly a 40% chance that inflation will break 5% this year.