UOB expects US inflation pressures to be broader than energy, after April CPI and PPI both reaccelerated. Core inflation measures are described as moving further above the Federal Reserve’s 2% target.
The bank now forecasts average headline CPI inflation of 3.7% in 2026 (previously 3.3%). It forecasts average core CPI inflation of about 3.0% in 2026 (previously 2.8%).
It projects both headline and core CPI to ease towards 2% in 2027, as base effects normalise. It also flags the risk that inflation stays above target for longer than earlier projections.
For 2026, it links potential inflation outcomes to Middle East developments and oil prices around US$100 per barrel. If oil prices fall well below US$100/bbl, it expects inflation to subside in the second half of 2026.
If the ceasefire breaks and conflict escalates, it says oil may move well above US$100. In that case, it states headline inflation could move towards 5% by the end of the second half of 2026.
It adds that the April PPI jump, and the gap between PPI and CPI, may point to further producer-to-consumer price pass-through ahead. The article notes it was produced using an AI tool and reviewed by an editor.
Given the reacceleration in April’s inflation data, we must now seriously question the market’s previous assumptions for rate cuts in 2026. The probability of a Federal Reserve cut by September has now fallen below 40% on interest rate futures markets, a significant repricing from just last month. Derivative positions that bet on imminent easing, such as long positions in SOFR futures, should be reconsidered or hedged.
These persistent price pressures suggest a more volatile environment for equities, particularly for rate-sensitive growth stocks. Looking back to the volatility spikes of 2022, we remember how quickly markets can turn when the Fed’s hands are tied by inflation. We should consider purchasing protection through VIX futures or buying put options on indices like the Nasdaq 100 as the risk of a market correction grows.
The geopolitical situation remains a primary driver for upside inflation surprises, with crude oil being the main channel. With WTI crude currently hovering near $88 a barrel, the risk of a spike above $100 remains very real if the current ceasefire falters. We see value in owning out-of-the-money call options on crude oil, such as third-quarter contracts with a $100 strike price, to profit from a potential inflationary surge.
Furthermore, the gap between producer and consumer prices suggests that companies have not yet passed all their cost increases on to customers. This hidden pipeline of inflation reinforces the view that the Fed will remain on hold longer than other central banks. This policy divergence supports a stronger US dollar, making long positions in dollar futures or call options against the Euro an attractive strategy.
