Inflation data to be released on Tuesday is expected to bring price increases to the highest level in nearly three years, posing a potential challenge for investors and Federal Reserve officials alike. The Consumer Price Index, a broad measure of the cost of goods and services across the U.S. economy, is expected to reach an annual rate of 3.7% in April, with monthly prices rising 0.6% as the oil crisis continues to hit consumers, according to the Dow Jones Consensus among economists. If so, headline inflation would be at its highest level since the early fall of 2023. At the time, prices were cooling due to a similar energy shock caused by Russia’s invasion of Ukraine. Jordi Visser, head of AI macro nexus research at 22V, wrote that the report “may not only confirm another unpleasant inflation record.” “The trend is that the last two months are going to look a lot more like 2022 than the disinflationary story that the markets are telling.” Indeed, there are growing concerns that financial markets are choosing to write off the current surge as a temporary event caused by the Iran war. Derivative contracts that hedge inflation risk are near their highest levels since October 2025 but are still relatively calm, and futures traders expect Fed officials to remain largely quiet until the inflation storm passes. Expected Risk Expectations may change as CPI reports gain traction or consensus. Inflation was slowly declining toward the Fed’s 2% goal. However, conflicts in the Middle East changed the situation completely, and even core prices excluding food and energy returned to an upward trend. Core CPI is expected to rise 0.4% from the previous month, with an annualized rate of increase of 2.7%. Mr. Visser noted that sustained increases in transportation and warehousing indexes indicate that price shocks extend beyond the energy industry. “Oil is not the whole story, but it is a very big part of why things are getting worse, and the Strait of Hormuz is not yet open,” he said. “This is not a one-off inflation scare. This is what happens when moving, storing and supplying all become expensive at once.” From a policy perspective, Visser said the Fed is in a “very precarious position” as the U.S. fiscal situation worsens, while inflation and labor market stability suggest a potential rate hike. “BOOM REGIME” “This is no longer a textbook battle between the Fed and inflation; it is a battle between controlling inflation, paying down debt, and political pressure to ease anyway,” he wrote, adding that incoming Fed Chairman Kevin Warsh’s desire to lower rates could usher in an “inflation boom regime by the end of the year.” At the same time, markets will need to brace themselves for the possibility that Warsh is unable to ease policy and the Fed is instead forced to raise rates. Mark Kavanagh, head of U.S. rates strategy at Bank of America, said in a note that the last rate hike cycle amid a post-COVID-19 inflation spike cost the S&P 500 25% and could hurt the market again. He added that the market is underestimating the risk of rate hikes. “The Fed’s actual rate hike today is likely to be much more modest than it would have been post-COVID,” Kavanagh said. “In any case, if the Fed’s interest rate hikes are aimed at cooling the economy and slowing growth, I’m concerned that risk assets will react negatively,” he said.
