Wells Fargo Economics expects April US CPI to strengthen, with headline inflation near 3.8% year on year and core inflation near 2.9%. It forecasts a 0.63% monthly rise in headline CPI and a 0.50% monthly rise in core CPI.
Energy prices linked to the Middle East conflict are expected to remain elevated and feed into other inflation areas. Core services are expected to drive much of the monthly increase.
Primary Shelter Inflation Outlook
Primary shelter inflation is expected to rise at twice its recent pace in April due to the reversal of a government shutdown-related survey issue. Shelter inflation is then expected to cool again from May, based on real-time rent measures.
Services excluding shelter are expected to stay strong, with higher jet fuel costs projected to push airfares up. Wells Fargo continues to forecast core CPI staying close to 3.0% year on year through this year.
It notes that slowing wage growth has reduced consumer purchasing power and may limit firms’ ability to pass on higher costs. This is expected to temper inflation by year-end while inflation pressures remain firm.
Looking back at the analysis from last spring, in 2025, we saw expectations for April’s CPI to be firm. Headline inflation was projected to climb toward 3.8% with core at 2.9%, driven by energy and services. These predictions highlighted a concern that inflationary pressures were becoming persistent.
Market Positioning Implications
Those concerns from 2025 proved valid, as shelter inflation did not cool as quickly as anticipated through the second half of the year. Core services remained stubbornly high, keeping the Federal Reserve on high alert for much of 2025. This past performance shows us how difficult it has been to get inflation fully back under control.
Now, in May 2026, we see a similar pattern with the latest April CPI report showing headline inflation at 3.6% and core unexpectedly firm at 3.7%. Recent data backs this up, with the latest retail sales figures for April 2026 showing a 0.5% month-over-month increase, suggesting consumer demand remains strong. This environment makes the Fed’s job of achieving its 2% target incredibly challenging.
Given this persistent inflation, we should position for a higher-for-longer interest rate environment. Traders should consider using SOFR options to hedge against the Federal Reserve delaying rate cuts further into 2027. The futures market is currently pricing in only one 25-basis-point cut by the end of 2026, a sharp reduction from the three cuts anticipated just a few months ago.
This uncertainty around inflation and Fed policy suggests higher market volatility is likely in the coming weeks. The VIX is currently trading near 14, a level that may not fully price in the risk of a hawkish surprise from the next FOMC meeting. Buying VIX call options or futures could serve as an effective portfolio hedge against sudden market downturns.
Echoing the concerns from 2025 about energy spillovers, ongoing geopolitical tensions continue to support oil prices, with WTI crude currently above $85 per barrel. This situation presents opportunities in energy derivatives. We believe long positions in WTI or Brent crude futures, or buying call options, are viable strategies to capitalize on sustained energy-led inflation.
