Washington is bracing for a fresh wave of unwelcome inflation news, with Bloomberg calling it a month full of bad inflation data, and the source is none other than the energy shock unleashed by the US war on Iran, which is still tearing through the US economy.

Forecasters expect inflation to accelerate again, both month-on-month and year-on-year, when the Personal Consumption Expenditures (PCE) price index lands this Thursday. PCE, as opposed to the more well-known Consumer Price Index (CPI), is the figure the Federal Reserve actually targets, and how it's built explains why.

CPI measures what a fixed basket of urban households reports paying out of pocket, while PCE casts a wider net, capturing spending made on consumers' behalf, like employer-paid health insurance, and it updates its basket more often to track how people substitute one purchase for another as prices shift.

That flexibility is why the Fed built its 2% inflation target around PCE, and Thursday's release is the number that will shape the Fed's future decisions, so markets are watching it closely.

Gasoline is doing the damage

The CPI report that already landed this month showed where the heat is coming from. Headline inflation hit 4.2% year-on-year in May, the fastest pace in over three years, up from 3.8% in April. Even when food and energy are removed, core inflation still comes in at 2.9%.

Energy alone drove more than 60% of May's monthly CPI gain, the US Bureau of Labor Statistics reported, as gasoline prices surged 40.5% from a year earlier, a direct consequence of the Strait of Hormuz closure that followed the US war on Iran and choked off oil and fuel supplies, sending prices climbing across the board.

The Fed holds the line, for now

Days before the latest CPI numbers, the Federal Reserve left interest rates untouched for a fourth straight meeting, keeping its target range at 3.50% to 3.75%. The June 17 decision marked the first policy meeting under new Fed Chair Kevin Warsh.

However, nine of the 18 Federal Reserve policymakers who submitted forecasts now expect at least one rate hike before year's end, six of them betting on two or more. That is a sharp reversal from March, when the median outlook still leaned toward cuts.

The central bank also raised its 2026 inflation forecast, pushing its PCE projection up to 3.6% from 2.7%. Futures traders have already adjusted, with rate-cut bets for this year having vanished, replaced by growing odds of a hike as early as October.

Source:Websites