Inflation is rising again: Will the Fed turn hawkish?

Will rising inflation force the Fed to abandon its rate-cut bias and adopt a more hawkish stance? As price pressures broaden beyond energy, a resilient labor market and persistent inflation risks could shape a pivotal FOMC meeting and the future path of US interest rates.

The FOMC meeting from 16-17 June 2026 will deliver the interest rate decision, with the market expecting the Fed to hold rates steady. Post-meeting guidance will be the market's primary focus, marking Wash's first address as the new Fed Chair. The current backdrop features rapidly rising inflation spreading across sectors, including core components. So, what will the meeting minutes reveal to us?

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Inflation pressures are broadening

The key question facing policymakers this week is whether the recent acceleration in inflation is significant enough to push the Fed toward a more hawkish stance than it adopted at the previous meeting. While headline inflation initially rebounded due to rising energy prices following escalating geopolitical tensions in the Middle East, recent data suggest that price pressures are spreading more broadly across the economy.

Headline CPI rose to 4.2% YoY in May, largely driven by higher energy costs. More concerning for the Fed, however, is the renewed increase in core inflation. After reaching a 5-year low of 2.5% YoY earlier this year, Core CPI has climbed to 2.8%, reflecting growing price pressures in sectors beyond energy.

A particularly important development is the rebound in shelter inflation. Shelter is one of the most persistent components of the inflation basket and accounts for roughly 35% of the CPI index. After trending lower for nearly three years following its February 2023 peak, shelter inflation began to reaccelerate in March 2026. Because housing costs tend to adjust slowly, a sustained rebound could make it significantly harder for overall inflation to return to the Fed's target.

At the same time, upstream price pressures continue to build. The Producer Price Index (PPI) surged 6.5% YoY in May, marking its highest reading since December 2022. Unlike the temporary inflationary impact seen during the tariff-related price shocks, the current increase suggests that rising input costs are increasingly being passed on to consumers through final goods and services prices. This increases the risk that inflation could remain elevated in the months ahead, even if energy prices stabilize.

Middle East tensions triggered a surge in energy prices, driving a rebound in the US CPI inflation since the conflict began and passing through to other economic factors.

Labor market strength keeps demand strong

Adding to market anxiety, the labor market shows no signs of cooling despite persistent inflationary pressures. A robust labor market will continue to fuel demand-pull inflation, potentially keeping inflation higher for longer.

Nonfarm payrolls (NFP) remain strong, with job gains rising continuously over the past three months. Upward revisions to these figures have brought the 3-month moving average to 188k—a very healthy number for the labor market. Notably, government payrolls have shown signs of rebounding since March following the decline driven by the Trump administration's spending cuts. Sectors like education and health, and leisure and hospitality, remain key drivers, buoyed by demographic structures, immigration policies, and a top-tier academic environment.

Job openings (JOLTS) also recovered to over 7.6 million, pushing the ratio of job openings to unemployed persons back above 1. This signals a very stable labor market with increasing job prospects for the unemployed. Consequently, this boosts consumer confidence regarding job security and new employment opportunities, as evidenced by very strong retail sales growth in recent months.

The robust spending power of US consumers can also be attributed to the wealth effect, as US stock indices continuously break all-time highs. This rally is propelled by massive investments in AI and AI-ancillary industries, a sector where the US maintains a leading global position. Technology serves as a powerful economic driver through significant productivity gains, rather than traditional inputs like labor or capital investment.

Robust NFP and low unemployment indicate a strong US labor market, which might pressure demand-pull inflation.

Why energy inflation could persist

Despite signals of a potential ceasefire agreement from US President Trump, oil prices may struggle to return to previous levels. Damage to oil field capacity in the Middle East and fears that conflict could reignite soon—even if a peace deal is signed—mean the market will maintain a significant risk premium. This could keep oil prices fluctuating around 70–80 USD per barrel rather than returning to the 60 USD range seen before the conflict.

While the US and Iran may make positive strides toward a peace deal, the regional situation remains highly complex. The risk of a rapid collapse remains high, as Israel may not comply with the agreement and could continue its attacks on Hezbollah in Lebanon or even target Iran directly, given centuries of deep-seated ethnic conflicts. Furthermore, this conflict has underscored the strategic importance of nuclear weapons for Iran to maintain its regional deterrence. Consequently, reaching an agreement on nuclear issues following a potential peace deal will likely remain difficult in the near term, and the situation could pivot abruptly.

FOMC meeting scenarios

Scenario 1 (Base case)

Hawkish hold—Removal of easing bias + upward dot plot shift (60% probability)—The market is currently pricing in this scenario.

• Rate decision: HOLD interest rates at 3.50% - 3.75%
• Guidance: Remove the phrase "next move is more likely a cut"
• Dot plot: 2026 median shifts from 1 cut USD \rightarrow 0 USD cuts
• Market reaction: The DXY (US Dollar Index) may find support from the Fed's mildly hawkish tone, but will quickly return to tracking peace deal developments

Scenario 2: Super hawkish

Clear hiking bias, September hike (30% probability)

• Rate decision: HOLD at 3.50% - 3.75%
• Guidance: Not only removes the easing bias, but also adds a hiking bias
• Dot plot: 2026 median shifts to 0 cuts, 1 hike
• Message: Guidance clearly states that inflation is spreading aggressively and rate hikes are necessary to tame it
• Market reaction: DXY could surge strongly to the 101–103 range if the Fed explicitly flags a rate hike as early as September

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Final thoughts: The Fed’s next move

US inflation is broadening across sectors and could continue to climb as prices have not yet fully reflected upstream cost pressures. When coupled with a strong labor market, inflationary pressures are compounded by both supply and demand factors. This makes inflation increasingly stubborn to bring down, even if a Middle East peace deal cools oil prices. Consequently, the FOMC may see internal divisions between holding and hiking rates, while likely abandoning any notion of further rate cuts entirely.

Frequently asked questions

What has driven the recent rise in US inflation?

Inflation is primarily driven by rising energy prices caused by the conflict in the Middle East. However, it is now broadening into the wider economy through other channels— impacting core components in particular. This could keep inflation elevated for longer, even if a peace deal is reached and oil prices fall.

What is the market expecting from the upcoming Fed meeting?

The market is currently pricing in a 99% probability that the Fed will keep interest rates unchanged at the upcoming June 16-17 meeting. Meanwhile, it maintains a greater than 50% probability of a rate hike at the December meeting.