finance
Inflation Tops Forecasts as Energy Prices Surge Post-Iran Conflict, Lifting Odds of Fed Rate Hike
A hotter-than-expected consumer price index report released May 11 or 12, 2026, sent market pricing to imply a 37% chance of a Federal Reserve rate increase by year-end. Energy costs tied to the Iran war that began in late February 2026 drove more than 40% of the CPI gain, lifting headline inflation to its highest level in nearly three years.
May 12, 1:33 PM·2m read1 source
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Markets on May 12, 2026, raised the probability of a Federal Reserve rate increase before the end of the year to about 37% after a hotter-than-expected inflation report, according to CME Group's FedWatch tracker. The same pricing took virtually any chance of a Federal Reserve rate cut off the table between May 2026 and the end of 2027, the tracker of 30-day fed funds futures contracts showed.
A customer shops for produce in an H-E-B grocery store on May 11, 2026 in Austin, Texas, as the Bureau of Labor Statistics released its consumer price index data that day or the next.
Since the Iran war began in late February 2026, energy prices have been soaring and accounted for more than 40% of the gain in the consumer price index. The headline inflation level reached its highest in nearly three years. Derivative contracts known as forwards have been climbing higher since the Iran war began in late February 2026 and were hovering around levels last seen in the autumn of 2025.
While consumer surveys have indicated elevated inflation expectations, market-based measures had been mostly benign until the recent shift. "At this point, I suspect they just stay on hold," Mark Zandi, chief economist at Moody's Analytics, told CNBC.
He added that the deciding factor for the Fed will be inflation expectations and if they break out any further the Fed will likely start raising interest rates.
The hawkish shift poses a particular challenge for incoming Fed Chair Kevin Warsh, who is expected to take the reins later in May 2026. Kevin Warsh has been outspoken in favor of cutting interest rates. "I just don't see how he's going to get any kind of support for cutting interest rates in the current environment," Mark Zandi said of Warsh.
