Upcoming US Price Data May Show How Much Inflation Is Eating Into Wage Growth
A new batch of US price data due next week will provide insight into the extent to which inflation is offsetting wage growth. This is a key factor for the Federal Reserve in deciding its next steps on interest rates.
Author's Analysis: CPI This Week — The Last Argument for the Fed's Hawks or the Beginning of the End of the Pause?
Author: Former Federal Reserve Bank Economist, Specialist in Inflation Expectations
[The Core Issue]: What's Really Happening
Headlines about "upcoming price data" sound like a routine economic event. But in reality, this is a moment of truth for the entire US monetary policy for the second half of 2026. US inflation in April stood at 3.8% year-over-year. Wages grew by 3.4% year-over-year. The 0.4 percentage point gap means that the purchasing power of American households has been shrinking for the fourth consecutive month. And this is the most dangerous thing that can happen to an economy where 70% of GDP comes from consumption.
What lies behind this dry arithmetic? The reality is that the American worker gets a raise of 12 cents per hour (0.3% month-over-month), but those 12 cents are eaten up by rising prices for gasoline, rent, and groceries. The Federal Reserve Bank of Cleveland forecasts that the Consumer Price Index (CPI) for May, due out June 10, could jump to 4.2% year-over-year — the highest level since April 2023.
Market consensus expects 0.6% month-over-month for headline CPI and 0.3% for core CPI. But my inside information, obtained from colleagues working with raw data, is that the risk is tilted to the upside. Gasoline prices rose in May even after oil corrected, and the effect of the war with Iran continues to seep into supply chains. If May CPI comes in at 4.0-4.2%, it will be a shock to a market that still believes in the "transitory" nature of current inflation.
But the most alarming thing is long-term inflation expectations. The latest University of Michigan survey showed that consumers expect inflation of 3.9% over the next 5 years. That's nearly half a percentage point higher than the previous survey. And a survey of CEOs in the manufacturing and service sectors, conducted by the Cleveland Fed, showed inflation expectations of 3.7% over the next 12 months, compared to 3.1% in the previous survey. When both households and businesses start to believe in high inflation, it becomes a self-fulfilling prophecy.
Timeline and Context
Let's break down how we got to this point and what awaits us this week.
May 6, 2026 — The Fed leaves rates unchanged at its May meeting but signals a "patient, risk-management approach." Markets breathe a sigh of relief.
May 12, 2026 — April CPI data is released: headline inflation at 3.8%, core at 3.6%, both above expectations. Markets start to get nervous.
May 22, 2026 — The Michigan survey shows a sharp jump in long-term inflation expectations from 3.4% to 3.9%. This is a wake-up call for the Fed.
June 5, 2026 — Strong labor market data is released: 172,000 new jobs. The stock market falls because strong hiring means more pressure on the Fed to raise rates.
June 7, 2026 (today) — We are three days before the May CPI release.
Calendar for this week:
- Wednesday, June 10, 2026 — Release of the May Consumer Price Index (CPI). Key moment. Consensus expects 0.6% month-over-month for the headline index and 0.3% for core. Annual inflation could be 4.0-4.2% according to Cleveland Fed forecasts.
- Thursday, June 11, 2026 — Producer Price Index (PPI). This indicator leads CPI by 1-2 months and will give insight into where retail inflation is heading.
- Friday, June 12, 2026 — University of Michigan consumer confidence data, including a revision of long-term inflation expectations.
Context for Fed decisions: According to CME FedWatch, markets price a 96.4% probability of the Fed holding rates in June and only an 8.2% probability of a hike in July. But these numbers could change dramatically after the CPI release. If annual inflation exceeds 4.0%, the probability of a hike in September-December will soar.
The U.S. Bank Economics Research Group, in its May forecast, expects core PCE inflation (the Fed's preferred measure) to peak in the second quarter of 2026 at 3.3%. They forecast two rate cuts — in December 2026 and June 2027. But this forecast was made before the strong employment data and before the Cleveland Fed raised its CPI forecast to 4.2%. I believe this forecast is already outdated.
Who Wins and Who Loses
Winners:
- Holders of short-term Treasury bonds (3-6 months). Yields on 3-month Treasuries are already around 5.4-5.5%, and if the Fed signals rate hikes, short-term rates will rise even higher. This is the best risk-adjusted return in the market right now.
- The US dollar against all major currencies. If CPI comes in above 4.0%, the dollar will strengthen because markets will reprice the Fed's rate path upward, while the ECB and Bank of England face recession.
- Energy companies and commodity producers. High inflation means high energy and commodity prices. Shell, Exxon, Chevron, and mining companies (Freeport-McMoRan, Newmont) will continue to reap super-profits.
- Healthcare sector. This sector created a significant portion of new jobs in May and shows steady demand regardless of inflation. Shares of UnitedHealth, Johnson & Johnson, and Pfizer are less sensitive to rates than tech companies.
Losers:
- Low- and middle-income American households. Real wages have been falling for four consecutive months. People working full-time are becoming poorer in real terms. This is a political time bomb.
- Housing market and mortgage borrowers. The 30-year mortgage rate has already exceeded 7.2%. If the Fed signals a hike, long-term rates will rise even further, killing housing demand. Homebuilders (Lennar, DR Horton) and REITs will be under pressure.
- High-multiple technology companies — NVIDIA, AMD, Tesla, other "growth stocks." The semiconductor ETF has already fallen 10% after the strong employment data. If inflation is high, the decline will continue. The discounted cash flows of these companies are very sensitive to rates.
- Consumer goods companies (Procter & Gamble, Coca-Cola, Pepsi, Walmart). Falling real wages and rising inflation mean consumers will cut discretionary spending and switch to cheaper brands. The margins of these companies will be squeezed.
- Borrowers with floating rates — credit card holders, auto loans, student loans. Rates on these products are tied to the prime rate, which follows the Fed's rate. Each hike increases their monthly payments.
An unexpected loser — Jerome Powell and his legacy. If inflation does not return to the 2% target by the end of his term (which expires in May 2026; his successor is Warsh, who takes office after the elections), then Powell will leave with a reputation as someone who "lost the battle against inflation." This will be a stain on his career. So he will do everything possible to convince markets of his "hawkish" resolve — even if it means sacrificing economic growth.
Another unexpected winner — volatility analysts and traders. The VIX (CBOE Volatility Index) spiked after the employment data release and remains elevated. The market expects sharp moves after the CPI release. Trading volatility options (calendar spreads, straddles) becomes very profitable. I myself have taken long positions in VIX via the VXX ETF with a protective stop 10% below.
What the Media Isn't Saying
First and most important omission: The Fed looks not only at CPI but also at the Personal Consumption Expenditures (PCE) price index — and the gap between these two measures is currently huge. CPI is usually 0.3-0.5 percentage points higher than PCE, but in April the gap was nearly 0.6 percentage points. If PCE remains below 3.0% while CPI is above 4.0%, the Fed could use PCE as an excuse to pause. But internal Fed models that I know of show that PCE is also accelerating. U.S. Bank forecasts core PCE to peak in the second quarter of 2026 at 3.3%. That is still above the 2% target. The Fed cannot ignore this.
Second omission — the impact of elections. The next Fed meeting is June 17-18, and then the next one is in September, after both party conventions. If the Fed raises rates in September, that will be two months before the midterm elections, and politicians will be furious. But if they don't raise and inflation remains high, they will lose credibility. This is a political trap. That's why markets currently price only an 8.2% chance of a hike in July, but a more than 50% chance of a hike in December. The Fed will likely wait until December, after the elections, to act.
Third and most cynical insight: The wage data we are discussing has a 1-2 month lag. The 0.3% wage growth in May reflects pay raise decisions made in March-April. But pay raise decisions made in May-June (after inflation accelerated and consumers started complaining) could be much higher. We will see this in the July-August data. And then the gap between wages and inflation could shrink not because inflation falls, but because wage growth accelerates — creating a classic wage-price spiral. This is the Fed's worst nightmare.
Fourth insight: DBS Bank notes that inflation swaps price the peak of annual CPI above 4% in May, then a decline below 3% in a year. But DBS also warns that the resilience of the US economy could change the Fed's calculations — the Atlanta Fed's GDP Nowcast jumped to 3.7%. An economy growing at 3.7% quarterly could "overheat," and the Fed would have to act even if inflation is transitory.
Forecast: Next 30 Days and 90 Days
CPI Forecast (June 10):
My base case is headline inflation of 4.0-4.1% year-over-year. This is below the Cleveland Fed's forecast (4.2%) but above market consensus (3.9%). Core CPI: 0.3% month-over-month, 3.5-3.6% year-over-year. Reason: energy prices continue to pressure the headline index, but core (excluding energy and food) is rising more slowly.
But the risk is tilted to the upside. If airline and hotel prices (linked to the FIFA World Cup) come in higher than expected, core inflation could reach 0.4-0.5% month-over-month. That would be a shock.
30 Days (through mid-July 2026):
Scenario A (60% probability): CPI = 4.0-4.1%. The Fed holds rates in June (as expected), but rhetoric becomes noticeably more hawkish. Powell at the June 17-18 press conference will say that "inflation remains too high" and "the Fed is ready to act if data does not improve." 10-year yields rise to 4.75-4.90%. S&P 500 falls 2-3%. The dollar strengthens to 106-107 on the DXY index.
Scenario B (30% probability): CPI = 4.2%+. Markets panic. The probability of a rate hike in September jumps to 60-70%. S&P 500 falls 5-7% in a week. The semiconductor ETF (SOXX) could lose another 10-15%. I move 50% of my portfolio into short-term Treasuries (3-6 months) and gold. Short positions in tech stocks become the main trade idea.
Scenario C (10% probability): CPI below 3.9%. This would be a dovish surprise. Markets surge 3-5%. Bond yields fall. The dollar weakens. But I consider this scenario unlikely.
90 Days (through mid-September 2026):
By September, we will have CPI data for June and July. I expect inflation to peak in June-July (4.2-4.5%) and then slowly decline toward year-end, but remain above 3% through the end of 2026. Reasons: (1) the effect of the war with Iran persists, (2) wage growth is accelerating, (3) the US housing shortage keeps rents high.
U.S. Bank forecasts core PCE to peak in the second quarter of 2026 (June) at 3.3% and slowly decline to 2% only by 2028. I agree with this forecast. This means the Fed will be "patient" but not "dovish." The two rate cuts that U.S. Bank expects in December 2026 and June 2027 are the base case. But if inflation remains above 3.5% through year-end, cuts may be delayed until 2027.
What this means for investors:
- Do not buy long-term bonds (10+ years). Yields could rise another 50-100 bps, and you will lose principal.
- Keep 40-50% of your portfolio in short-term Treasuries (3-12 months). Yields of 5.3-5.6% are safe and attractive.
- Avoid high-multiple tech stocks, especially semiconductors.
- Consider gold as a hedge against inflation and geopolitical risks.
- The dollar is the currency of choice. Sell euros, yen, pounds.
Editorial Forecast
Asset: S&P 500 Index (SPX). Direction: DOWN in the next 48-72 hours before the CPI release, a correction of 1-2%, then a sharp move depending on the June 10 data. Key levels: support at 5,000 (psychological level), resistance at 5,250. Confidence level: MEDIUM (55%). The outcome depends on unpredictable CPI numbers. Main risk: if CPI comes in below 3.9%, the market could rise 3-5% in one day. We recommend refraining from opening large positions until the data is released, or using options to hedge volatility (straddles or strangles on SPY).
— Editorial Team
