US consumer prices climbed more than expected in April, reigniting fears that persistent inflation will keep the Federal Reserve sidelined well into next year and potentially force its hand toward rate hikes, analysts warned Tuesday.
Headline CPI rose 3.8% year-on-year, driven largely by surging energy prices linked to the Iran conflict and disruption through the Strait of Hormuz. Core inflation remained stuck well above the Fed's 2% target at roughly 2.8%, underscoring persistent price pressure across services.
Chris Zaccarelli, chief investment officer at Northlight Asset Management, said the combination of sticky inflation and a resilient labor market has effectively closed the door on near-term easing. "Given that inflation is heading in the wrong direction and the labor market is holding up, it's very unlikely that the Fed will be able to lower interest rates any time soon," he said, adding that markets may begin pricing in rate hikes for next year.
While stocks have rallied 16.9% since the March lows on strong earnings, Zaccarelli cautioned that multiple expansion is no longer in the cards. "Earnings will need to keep doing a lot of the heavy lifting," he said.
Bank of America echoed that caution, flagging core services ex-housing at 0.5% month-on-month as the key concern, led by airfares, lodging, and other personal services. While core goods were roughly flat, suggesting tariff effects may be fading, the bank sees rising risks that core PCE could settle in the 2.5% to 3% range even after those effects roll off. "This would preclude additional rate cuts,” analysts wrote.
“We remain comfortable with our view that the Fed will be on hold until 2H 2027. Markets are even starting to price hikes. In our view, the u-rate would have to drop to/below 4% for hikes to be on the table. We are still some ways away from this outcome.”
The report also arrives at a politically charged moment, with incoming Fed chair Kevin Warsh expected to take office imminently. Nigel Green, CEO of deVere Group, warned the data has sharply curtailed Warsh's room to manoeuvre before he even begins. "This CPI print has boxed the next Fed chair in before he even sits down," Green said. "Kevin Warsh wants room to reduce rates, but the inflation data simply does not give him that space without credibility risk."
Green added that the deeper risk facing the Fed is not one of timing, but of credibility. "The danger for the Fed is not whether rates come down this year or next. It's whether markets believe decisions are being driven by data or by pressure."