US April CPI Set for Release: Could the Fed Shift to a Rate Hike Stance?

Tradingkey - The U.S. Bureau of Labor Statistics is about to release the April CPI report. Current top investment banks generally believe that the timing of the Federal Reserve's first rate cut will be delayed until 2027, with no rate cuts expected in 2026. JPMorgan has conducted three scenario analyses around the CPI data—even in an optimistic scenario where the rapid easing of geopolitical conflicts in the Middle East brings oil prices back to normal levels, it would not be enough for the Fed to restart the rate-cut cycle.

While a rate cut this year has been ruled out, the likelihood of a rate hike appears to be gradually rising. According to CME FedWatch, market pricing currently shows a 97.7% probability of the Fed maintaining rates in June and a 94.6% probability in July. The probability of keeping rates unchanged in September is also as high as 89.2%, but the probability of a 25-basis-point hike has reached 5.7%, followed by a 14% chance of a hike in October and a further increase to 23.7% for December. This suggests that the market has not ruled out the possibility of the Fed pivoting toward rate hikes.

Coincidentally, Nick Timiraos, known as the "Fed whisperer," recently stated: "The next step in the policy discussion will be when and how to shift to 'neutral'—where the likelihood of a rate hike or cut becomes roughly equal—and the answer will likely depend almost entirely on future inflation data."

Chicago Fed President Austan Goolsbee also struck a hawkish tone, stating: "All interest rate options are currently on the table, not just rate cuts." This implies that both rate cuts and hikes are within the Fed's scope of consideration.

These hawkish remarks have focused market attention on the upcoming April CPI report. Let’s first look at the key issue of oil price transmission in this report.

Regarding oil prices, international crude oil prices fluctuated widely in April, with the Brent crude price center remaining at a high level of $105-$110. This has also pushed up U.S. gasoline prices; as of May 8, the average domestic gasoline price in the U.S. has risen above $4.50 per gallon, continuing to hit new highs since July 2022. It is now a "foregone conclusion" that energy prices will continue to drive up the headline U.S. CPI for April.

This places one of the key focus areas of this CPI report on the dual effects of rising oil prices: the extent to which the dampening effect of high oil prices on terminal demand can inversely offset the upward pressure they exert on inflation.

Based on the latest data, the consumption sub-component of U.S. GDP for the first quarter of 2026 shows that household spending on accommodation and food services has declined for four consecutive quarters on a quarter-on-quarter basis and has turned negative for two consecutive quarters. This trend partially reflects the negative impact of high oil prices on residential travel and related consumer demand.

Secondly, attention should be paid to whether the year-on-year downward trend in the weaker shelter inflation and wage inflation from the April non-farm payrolls can significantly alleviate the stickiness of super-core inflation.

In terms of market consensus trends, traders and Bloomberg Intelligence analysts generally believe that U.S. CPI growth will reach its peak for this cycle in the second quarter of 2026 before entering a downward path. Using the inflation evolution path following the 2022 Russia-Ukraine conflict as a reference, it will be crucial to track three core indicators over the next quarter: inflation expectations, inflation structure, and inflation breadth. If scenarios similar to June 2022 occur—where inflation expectations and core inflation significantly exceed expectations for consecutive periods—the probability of an unexpectedly sharp tightening of Fed monetary policy will rise significantly, potentially triggering major volatility in global financial markets.

However, in the base case otherwise, considering the continued crowding-out effect of high oil prices on discretionary consumption, the supportive drag from falling housing prices on overall inflation, and the fact that the University of Michigan Consumer Sentiment Index for May still fell short of expectations, U.S. inflation for the year will most likely follow the evolution path seen after last year's reciprocal tariff shocks. Under this scenario, the probability of core inflation significantly exceeding expectations remains low.

Considering the current stage of U.S. economic fundamentals, the Federal Reserve may continue its decision to maintain interest rates. However, a substantive pivot toward a rate-hike stance still lacks support from economic data.