Energy shock drives inflation higher
The US consumer price index rose to 4.2% year-over-year in May 2026, the highest reading in three years. The primary driver was energy, which surged 3.9% month-over-month amid ongoing disruptions from the Iran conflict and concerns about oil transit through the Strait of Hormuz. Core CPI, which excludes food and energy, edged up to 2.9% annually.
Rate hike odds jump as cuts priced out
The hotter-than-expected inflation data has reshuffled Federal Reserve expectations. According to the CME FedWatch tool, markets now see a 43% chance of a quarter-point rate hike by December 2026, with odds of any 2026 rate cut essentially eliminated. This marks a stark reversal from early 2026, when markets had priced in multiple cuts.
Global inflation pressures mount
The OECD reported that year-on-year inflation across advanced economies reached 4.4% in April, up from 4.0% in March. Europe continues to grapple with energy price spillover from Middle East instability. The PNC economics team noted the May CPI data keeps the Fed firmly on hold and that any rate cuts are now unlikely before mid-2027 at the earliest.