U.S. April CPI Preview: Fed May Abandon Rate Cuts Until 2026?

Reviewing last month's Consumer Price Index, the March CPI rose 0.9% month-over-month, in line with expectations and marking the largest single-month increase in nearly four years since June 2022; on a year-over-year basis, it climbed sharply to 3.3%, jumping 0.9 percentage points from February to hit a new high for 2024. Gasoline prices, in particular, saw their largest monthly increase since records began in 1967, accounting for nearly three-quarters of the month-over-month gain and serving as the primary driver of the CPI's upward trajectory.

However, core inflation (excluding food and energy) rose only 0.2% month-over-month, suggesting that the secondary effects of the energy shock have not yet been reflected in the March inflation report, and April data faces the risk of further increases. For instance, high jet fuel prices will directly raise airline operating costs; rising diesel prices will fully transmit through the road transportation sector, pushing up distribution and retail prices for all consumer goods; and higher fertilizer prices will directly drive up household food bills.

It is worth noting that the surge in inflation will also gradually impact consumer payment pressure. Due to consumer concerns over the impact of inflation on personal finances and buying conditions, U.S. consumer confidence has plummeted to new historic lows in recent weeks.

Data from the University of Michigan showed that the preliminary consumer sentiment index for May fell to 48.2 from 49.8 in April. Consumers expect prices to grow at an annual rate of 4.5% over the next year, a slight decline from the previous month; long-term inflation expectations for the next 5 to 10 years stood at 3.4%.

Joanne Hsu, Director of the Surveys of Consumers, stated in a release that consumers continue to be impacted by cost pressures, primarily driven by surging oil prices, and noted that confidence is unlikely to be significantly bolstered by the Middle East situation until supply disruptions are fully resolved and energy prices retreat. Recent data shows that the national average gasoline price in the U.S. has risen above $4.50 per gallon, the highest level since mid-July 2022.

Oil price pass-through not only affects consumer confidence but also has a profound impact on the trajectory of Federal Reserve monetary policy. The latest non-farm payroll data shows that the U.S. labor market remains strong, proving that there is no conflict between the Fed's dual mandate and providing sufficient reason for the Fed to continue maintaining interest rates.

This has also significantly increased market attention on April's inflation data. Currently, there is still extreme uncertainty regarding the future trajectory of U.S. inflation, with the core variables being the duration of this energy shock and the pace at which the free flow of crude oil through the Strait of Hormuz is restored. If inflation readings continue to run high, the window for Fed rate cuts this year will close completely.

Bank of America 's latest forecast has completely overturned its judgment on rate cuts within the year, significantly pushing back the timing of the Fed's first rate cut to the second half of 2027. Previously, Bank of America had predicted that the Fed would cut rates once in both September and October of this year, with the core logic being that Warsh would steer policy toward easing after succeeding as Fed Chair; however, with changes in the economic situation, this view has been fully revised.

Bank of America economists have clearly stated that they no longer expect any rate cuts from the Fed in 2026, while noting that multiple shocks—including the war in Iran, tariff policies, and the rise of AI—are significantly increasing the difficulty of forecasting interest rate trends.

JPMorgan has constructed three scenario projections centered on CPI:

In the pessimistic scenario, peak inflation breaks 5% and remains elevated

This scenario is the highest-risk extreme case, with the core assumption being: the U.S. implements militarized control over the Strait of Hormuz, and Iran launches a counterattack causing widespread damage to oil and gas infrastructure in the Middle East. With the conflict entering its third month, global crude oil inventories will deplete rapidly and be deeply exhausted, completely losing any upward constraint on oil prices.

In this scenario, international crude oil prices would surge well past $120 per barrel and fluctuate at high levels throughout the summer, not starting to decline until the fourth quarter of 2026; the peak of year-over-year CPI growth would exceed 5% and remain high for an extended period, with the disinflation process coming to a complete standstill.

In the neutral scenario, inflation peaks at 4% before retreating rapidly

The core reference for this scenario is the inflation trend following the 2022 Russia-Ukraine conflict: that year, oil prices surged in the first half driven by geopolitical conflict before quickly reversing and falling. If the current Middle East conflict follows a similar evolutionary path, the month-over-month changes in energy CPI from 2022 can serve as a reasonable reference for this forecast.

However, core differences must be clarified: in 2022, inflation was already high, with supply chain disruptions from the global economic reopening being the core driver, and the Russia-Ukraine conflict merely adding fuel to the fire; conversely, the current inflation starting point is significantly lower, and with terminal demand expected to weaken moderately, endogenous disinflationary forces remain intact. Therefore, the peak of this round of inflation will be far below the 2022 high, with year-over-year CPI growth expected to peak at 4% before retreating rapidly.

In the optimistic scenario, inflation is near its peak and will gradually decline moderately

The core assumption for this scenario is: progress in diplomatic mediation is faster than market expectations, the situation in the Middle East eases rapidly, and international oil prices gradually return to normal levels. In this scenario, the month-over-month growth of headline CPI would return to the average of the 12 months prior to February 2026, opening a moderate downward channel for inflation.

JPMorgan believes that even in this most optimistic scenario, U.S. year-over-year CPI growth will remain above 3.0% until February 2027, making it difficult to fall quickly back to the Fed's 2% policy target. Regardless of the scenario, inflation will remain above the Fed's 2% target before early 2027, making rate cuts in 2026 essentially hopeless.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.