Inflation in the United States in May is feared to return to the "4 era"! Wall Street's rate cut dream shatters, the Federal Reserve may be forced to return to "raising interest rates".

Notice that as the living costs of American consumers continue to rise, the inflation data to be released on Wednesday is expected to exceed another unpleasant threshold. If Wall Street's consensus forecast is accurate, the US CPI for May is expected to increase by 0.5% month-on-month, with a year-on-year inflation rate reaching 4.2%. This will be the first time the CPI has surpassed 4% since May 2023, and will also mark the highest reading since April of that year. Earlier, the overall inflation rate in April was 3.8%, with a core inflation rate of 2.8%. However, compared to the overall inflation rate of just 2.4% a year ago, the significant increase in this round of data is largely attributed to the soaring energy costs triggered by the Iran war. According to Dow Jones' forecast, even when excluding food and energy, the core CPI is expected to reach 2.9% year-on-year after a 0.3% increase month-on-month in May. Inflation outbreak There is growing concern in the market about the widespread outbreak of inflation. As oil prices soar and begin to transmit to the entire economy, people increasingly expect that inflation will not recede in the short term. Liz Ann Sanders, chief investment strategist at Charles Schwab, said, "This is not just a story about oil, it's also a story about monetary supply, and increasingly related to AI," "So this is more than just an energy inflation problem, which means we may still face some kind of sticky inflation." Sanders added that investors' "many anxieties" are rooted in inflation, so "any outcome worse than expected may make the stock market uneasy." The Trump administration had previously insisted that once the Middle East conflict subsides, inflation will quickly fall. However, Sanders advised not to hold high hopes for this, as the supply side has already suffered significant disruption. She said, "Even if the war can be quickly resolved, oil prices may not be able to return to previous lows because production has been disrupted too much," "This is not something that can be restored instantly like flipping a switch." The interest rate cut channel completely closed For the Federal Reserve, the May inflation data is undoubtedly a heavy blow. Prior to the release of the data, the market was already sharply divided on the outlook for monetary policy, but the expected reading of 4.2% will completely put an end to any fantasies about "rate cuts this year." With the federal funds rate still relatively high, and with inflation rearing its head again, the Federal Reserve not only loses room for rate cuts, but also faces pressure to tighten policy again. From a policy logic perspective, the Federal Reserve's core mission is to maintain price stability. When inflation exceeds 4% and core inflation approaches 3%, this far exceeds the long-term target range of 2%. If the Federal Reserve chooses to remain idle, it will severely damage its policy credibility and may trigger a self-fulfilling inflation expectationonce a vicious cycle of companies raising prices and workers demanding higher wages forms, the cost of governance will rise exponentially. What decision makers are even more concerned about is that the breadth of current inflation is expanding. From energy to AI-related industries, from goods to services, the chain of transmission of price increases is becoming increasingly clear. This "widespread" pattern of price increases means that simply relying on supply-side fixes (such as falling oil prices) is no longer sufficient to solve the problem, and policy suppression on the demand side is imperative. Probability of rate hikes rising this year In this context, the Federal Reserve restarting rate hikes this year is no longer a low-probability event. Although the Trump administration continues to exert pressure, claiming that inflation will "fall rapidly" once the situation in the Middle East eases, Sanders bluntly refutes this: the structural damage to the supply chain is irreversible, and the recovery of production capacity is far from quick. From the market's pricing perspective, the outlook for rate cuts implied by current interest rate futures will face a sharp correction. Investors need to prepare for a "higher and longer" or even "higher plus" rate path. Sanders said bluntly: "If the data is worse than expected, the stock market probably won't buy it." This means that if the CPI data confirms a breakthrough of 4%, the US stock market may experience a sharp correction, and the yield curve of US Treasury bonds will steepen again. For the decision-making level of the Federal Reserve, the interest rate meetings in June and July will become key observation windows. If the May inflation data is confirmed, and the June data continues to rise, the Federal Reserve is very likely to take preventive rate hike measures in the third quarter to anchor inflation expectations. This "proactive" strategy may temporarily suppress economic growth, but compared to allowing inflation to spiral out of control, it is still the lesser of two evils.