A FedEx Corp. worker unloads packages from a truck in front of the New York Stock Exchange (NYSE) in New York City on May 4, 2026.
Economists raised their U.S. inflation estimates and pushed out their timeline for the next Federal Reserve interest rate cut as the price shock triggered by the Iran war starts to spread beyond higher energy costs. The personal consumption expenditures (PCE) price index is now expected to rise 3.9 percent in the second quarter from a year earlier, up from a 3.6 percent estimate last month, according to the latest Bloomberg survey of economists. They also marked up their inflation projections for each subsequent quarter through early 2027.
Forecasters expect the so-called core PCE metric—which strips out food and energy costs—to advance more than previously estimated, with both gauges predicted to remain above 3 percent through the end of the year. They're now evenly split on whether the Fed will lower rates in December, after predicting in the previous survey that the next cut would come in October.
The Iran war is reigniting inflation, straining consumers who were already frustrated by the high cost of living. As the war drags on, some central bankers are starting to question whether they can look through the latest price shock.
"This is deja vu all over again, with the Fed and the markets concerned the energy price spike will generate inflation, just as they feared tariffs would last year," said Luke Tilley, chief economist at Wilmington Trust Corp. "With consumers in a weakened state, it's much more likely they will respond by cutting spending on other items as they pay more at the pump."
The survey showed economists still see consumer spending and gross domestic product (GDP) rising about 2 percent this year, little changed from previous estimates. The chance of a recession in the next 12 months moved lower, to 25 percent.
A key question going forward is whether the impact of the conflict will result in slower hiring. Tax cuts are providing a tailwind for consumer spending and business investment, but a pullback in household demand or sustained rise in input costs may prompt companies to recalibrate by shedding hours or positions.
Economists nudged up their estimates for payroll growth this year but continued to see the unemployment rate peaking at 4.5 percent in the third quarter. The Bloomberg survey of 88 economists was conducted May 15 to 20.
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