What today’s PCE Price index could mean for the US Fed’s rate hike timeline

Markets are pricing in at least two Fed rate hikes over the next 12 months, though the timing will remain data dependent, with hopes that easing Middle East tensions and falling oil prices could provide some relief.

Written by Sunil Dhawan

June 25, 2026 13:21 IST

Fed rate hikes, US inflation, CPI May 2026, PCE price index, Middle East tensions, oil prices, US economy, Federal Reserve, energy index, financial markets

The latest US CPI data for May showed annual inflation at 4.2%, with the energy index surging 23.5% over the year, the most striking component of the latest inflation print.

Inflation seems to have made a comeback in the US economy. What is interesting is the change in the narrative now. According to market experts, with oil prices falling, the risk of the economy running hot will increase, leading the US Fed to hike rates.

The US Fed has the task cut out — to tame inflation. The new US Fed chair, Kevin Warsh, in his statement at the previous FOMC meeting, stated that price stability will be the focus.

Meanwhile, the US Federal Reserve faces renewed challenges as inflation, initially reduced from 9.1% in June 2022 to 2.5%, has increased again due to tariffs and the Iran war.

PCE Price Index: What to Expect

How hot US inflation is running will be revealed today. The US Bureau of Economic Analysis (BEA) will release the Personal Income and Outlays for May 2026, including the PCE Price Index, on June 25.

If the PCE price index, the Federal Reserve’s preferred inflation measure, for May shows elevated levels, it will become more challenging for the US Fed to maintain price stability.

According to a survey of economists conducted by Dow Jones Newswires and The Wall Street Journal, forecasters anticipate that Thursday’s Personal Consumption Expenditures price index will reveal a 4.1% increase in inflation over the 12 months ending in May, up from 3.8% in April — the highest since 2023.

How Is US CPI Moving?

The latest release of US CPI data for May also showed a spike in annual inflation, rising 4.2%, after rising 3.8% in April. The core inflation in May (all items less food and energy index) rose 2.9% over the year, following a 2.8% increase over the 12 months ending April. What is most striking is the energy index, which increased 23.5% for the 12 months ending May.

How well inflation has embedded into the economy remains to be seen. A rising inflationary scenario has several implications for the financial markets.

US Fed and Rate Hike Expectations

Markets expect a rate hike anytime between September and December, and at least two hikes over the next 12 months. But whether the US Fed goes for a hike, or at least a pause, will largely be data-dependent.

What the US Fed and the market may hope is that rising prices are due to supply shocks rather than demand factors, with potentially favorable news from the Strait of Hormuz.

Good news has started flowing in from the Middle East, but it remains uncertain for how long.

Brent crude prices fell below $73 per barrel for the fourth consecutive session on Thursday, erasing all gains from the Middle East conflict’s outset, due to improved US-Iran peace efforts that improve supply prospects.

Further, a temporary US waiver for purchasing pre-loaded Iranian oil is expected to boost supply. Consequently, Brent’s prompt spread turned bearish into contango — where the future price is higher than the current spot price — reflecting weaker market sentiment for the first time since the conflict began.

Financial Markets

The US stock market is holding ground backed by optimism in the AI industry stocks. A rate hike scenario may come back to hurt markets as higher borrowing costs impact corporates as well. The dollar has regained its lost strength, with the dollar index trading near 101.5 on Thursday, holding around its highest levels in more than a year. The index is up over 4% in the last 12 months.