US PCE Inflation Expected to Accelerate to 3.8% Annual Rate Due to Energy Prices
Experts forecast that the core PCE index will rise 0.3% in April, pushing annual inflation to 3.2%. However, headline PCE inflation is projected to accelerate to 3.8% year-over-year due to a sharp spike in gasoline and food prices amid the crisis in the Strait of Hormuz.
PCE at 3.8%: Why the Fed Can Neither Raise Nor Hold Rates
[The Gist]: What's Really Happening
The RBC and Oxford Economics forecast that headline PCE inflation will rise to 3.8% year-over-year in April is not just a statistical observation. It is a moment of truth for new Fed Chair Kevin Warsh.
The numbers look like this: core PCE inflation will rise 0.3% month-over-month, pushing the annual rate to 3.2%. But headline PCE, which includes energy and food, will surge 0.5% month-over-month, reaching 3.8% year-over-year — the highest level since May 2023.
For context: in March, headline PCE stood at 3.2%. A 0.6 percentage point increase in one month is a serious acceleration.
Why is this critical? PCE is the Fed's preferred inflation indicator. And if it shows 3.8% against a 2% target, the rate-setting committee is formally obligated to tighten policy. But at the same time, real consumer spending in April is expected to contract by 0.1%. The economy is slowing while inflation is accelerating — a classic stagflationary dilemma.
Timeline and Context
- May 12, 2026: April CPI data released. The numbers shock markets — headline inflation accelerated to 3.8% year-over-year, and core to 2.7%. Gas and food are the main drivers.
- May 12-22: Analysts revise PCE forecasts. Oxford Economics publishes its nowcast — expecting the hottest PCE since early 2023.
- May 22, 2026: 10-year Treasury yield at 4.544%, 30-year at 5.058%. Correlation between S&P 500 and bond yields drops to -0.70 — the lowest since 1999. Markets no longer believe the Fed is in control.
- May 23, 2026: RBC confirms the forecast — expected PCE at 3.8%, real spending down 0.1%.
- May 28, 2026 (tentative): Scheduled release of April PCE data. This date will be the catalyst for the next market move.
Important context: April CPI showed an anomaly due to a BLS methodological glitch related to processing housing data during the October government shutdown. For PCE, housing has a smaller weight, so core PCE inflation will be lower than CPI. But headline PCE inflation will still be high due to energy and food.
Who Wins and Who Loses
Winners:
- Holders of short positions in long-term bonds (TBT, TMF puts). Rising inflation and uncertainty around Fed policy keep yields high. 30-year yields above 5% is a level where bond shorts remain profitable.
- Speculators on the CPI-PCE divergence. Oxford Economics clearly states: CPI and PCE will diverge in 2026. CPI overweights energy, PCE overweights software (due to the AI boom). Traders who understand this mechanics can arbitrage inflation swaps and TIPS.
- Software companies (Microsoft, Oracle, Salesforce). Computer software prices have risen amid demand for AI solutions, and this increase directly affects core PCE. For these companies, inflation is not a problem but a reflection of their market power.
Losers:
- The Fed and Kevin Warsh personally. The new Fed chair takes office at the worst moment in years. Inflation is accelerating, but raising rates is not possible — real spending is falling, and the savings rate has dropped 1.5 percentage points over the year to 3.6%. Any tightening would crush the consumer. Any easing would fuel inflation.
- Low-income consumers. The savings rate is falling, and credit burdens remain high. RBC warns: if savings continue to decline and interest expenses on non-mortgage loans (auto loans, credit cards) start to rise, it will become a "red flag for consumer stress."
- Banks with large long-bond portfolios. 30-year yields above 5% mean the value of their bond portfolios continues to fall. Unrealized losses that seemed like a 2023 problem are returning.
- The stock market overall. The correlation between the S&P 500 and 10-year yields has reached -0.70 — a rare phenomenon since 1999. This means every rise in yields (inflation expectations) now weighs on stocks. The classic 60/40 defensive strategy (60% stocks, 40% bonds) has stopped working.
What the Media Isn't Saying
Non-obvious insight: The Fed actually cannot afford to publish "cold" PCE data. Paradoxically, Warsh benefits from high PCE.
The logic is as follows. If PCE comes in below expectations (e.g., 3.5% instead of 3.8%), markets will take it as a signal for rate cuts. But cutting rates now would mean admitting the economy is in recession. And that is politically unacceptable 5 months before the midterm elections.
If PCE comes in above expectations (4.0%+), the Fed gets justification to keep rates high or even raise them. This allows Warsh to show he is "fighting inflation" without taking real action that would kill the consumer. High inflation becomes a political alibi.
Second point: Oxford Economics directly states that energy and food are the main drivers of PCE growth. But the FAO and other organizations have already warned: the blockade of the Strait of Hormuz will hit fertilizer supplies, leading to higher food prices over the next 6-12 months. A third of global maritime fertilizer trade passes through the strait. This means the current inflation spike is not temporary but long-term. Markets have not yet priced this in.
Third: Bloomberg Economics and other sources warned as early as early May that April CPI would be "deceptively hot" due to methodological issues with housing data. But PCE, which is less dependent on housing, will show a more accurate picture. And that picture will still be hot — 3.8% — without excuses of "methodological artifacts."
Forecast: Next 30 Days and 90 Days
30 days (by end of June 2026)
- May 28 (tentative) — PCE release. I expect confirmation of the forecast: headline PCE 3.8%, core 3.2%.
- Market reaction: immediate. S&P 500 could fall 1-2% on the day of release as investors realize rates will not be cut in 2026. 10-year yields will jump to 4.7-4.8%.
- June FOMC meeting (June 11-12): Warsh will hold rates at 3.50-3.75%, but rhetoric will turn hawkish. The word "patience" will disappear from statements.
90 days (by end of August 2026)
- Optimistic scenario (25%): Oil prices fall amid a truce with Iran. Gasoline becomes cheaper, PCE in May and June slows to 3.0-3.2%. Warsh gets room to maneuver. Markets rally.
- Base scenario (55%): Status quo in the Persian Gulf. Brent oil $95-105. PCE stays in the 3.5-3.8% range through summer. Fed holds rates. Markets flat with a bearish bias.
- Pessimistic scenario (20%): Escalation in the Persian Gulf. Brent oil $120-130. PCE accelerates to 4.2-4.5% by August. Fed forced to raise rates by 0.25% amid a falling economy — classic stagflation. S&P 500 falls 10-15% from current levels.
Editorial Forecast
Asset: 10-year US Treasury bonds (TLT — long-term Treasury ETF). Direction: Down (yields up) over the next 48-72 hours as markets price in a hot PCE of 3.8% ahead of the official release on May 28. Key levels: Current yield 4.544% will break through 4.65-4.70% by end of week; support for TLT at $85 per share. Confidence level: High (75%). Main risk: If the Trump administration announces a breakthrough in talks with Iran before the PCE release, oil will fall, inflation expectations will decline, and yields could correct 20-30 basis points in 24 hours — but that would be a temporary move before a more sustained trend.
The editorial opinion is analytical in nature and does not constitute individual investment advice.
— Editorial Team
