Economists raise US inflation expectations and postpone their forecasts for the timing of Federal Reserve rate cuts.

As the price shocks triggered by the Iran war begin to spread from energy costs to a wider range of sectors, economists have raised their forecasts for U.S. inflation and postponed their predictions for the next Federal Reserve rate cut.

According to Bloomberg's latest survey of economists, the U.S. personal consumption expenditures (PCE) price index is now expected to rise 3.9% year-on-year in the second quarter, up from 3.6% predicted last month. Economists have also raised their inflation forecasts for each quarter through early 2027.

Economists expect the core PCE index, excluding food and energy prices, to rise more than previously anticipated, and believe that both overall PCE and core PCE will remain above 3% by the end of the year. Regarding whether the Federal Reserve will cut interest rates in December, respondents are currently evenly divided; in the previous survey, they generally expected the next rate cut to be in October.

The war in Iran is reigniting inflationary pressures, further straining consumers already dissatisfied with the high cost of living. As the war continues, some central bank officials are beginning to question whether they can continue to ignore this round of price shocks.

“It’s like history is repeating itself,” Bloomberg quoted Luke Tilley, chief economist at Wilmington Trust Corp., as saying. “The Fed and markets are worried that soaring energy prices will trigger inflation, just like they were worried last year that tariffs would push up inflation.” He added, “With consumers already relatively weak, they are more likely to cut back on other spending because of rising fuel costs.”

Surveys show that economists still expect U.S. consumer spending and GDP growth to be around 2% this year, largely in line with previous forecasts. The probability of a U.S. recession in the next 12 months has fallen to 25%.

A key question for the future is whether this conflict will lead to a slowdown in hiring. Tax cuts are supporting consumer spending and business investment, but if household demand weakens or business costs continue to rise, companies may readjust their operating strategies by cutting hours or laying off employees.

Economists have slightly raised their forecasts for nonfarm payroll growth this year, but still expect the unemployment rate to peak at 4.5% in the third quarter. The Bloomberg survey, conducted from May 15 to 20, polled 88 economists.

Source: [Lianhe Zaobao] (https://www.zaobao.com/news/world/story20260522-9093162)