Wells Fargo economists report that conflict involving Iran and rising oil prices are pushing consumer inflation higher in the US, interrupting the recent disinflation pattern. They expect higher energy costs to lift the path of inflation and affect a range of household prices.
They forecast the PCE deflator will peak at 3.7% year-on-year in Q2. They also project headline PCE to reach 3.7% year-on-year in Q2.
Core PCE Outlook Through 2026
They expect core PCE inflation to end the year at 2.8% on a Q4-over-Q4 basis. They forecast core PCE will remain between 2.7% and 3.1% through 2026.
They note that higher prices at the petrol pump have fed through quickly. They add that domestic natural gas prices in the US have generally remained in check.
They expect higher fuel costs to raise production and transport expenses. They identify airfares and food as categories likely to face upward pressure.
They state that moderating shelter inflation and the unwinding of tariff-related pressures may offset some of the energy effect. They say this would not fully counter the rise in energy-related inflation.
Implications For Rates Volatility
Looking back from our current standpoint in April 2026, the analysis from early 2025 regarding an oil shock was directionally correct for that time. The conflict-driven spike in energy prices did stall disinflation, pushing headline PCE up to 3.5% in the second quarter of 2025. This event delayed any Federal Reserve pivot and kept markets on edge for most of last year.
The energy shock, however, proved less persistent than some had feared, with WTI crude prices falling from a peak of over $95 per barrel in mid-2025 to a more stable range in the low $80s where they trade today. We saw that increased non-OPEC production and an eventual easing of geopolitical tensions were underestimated factors. This stabilization has been critical in allowing the disinflationary trend to recently resume.
As a result, while core PCE inflation did remain stubbornly sticky around 2.9% through late 2025, the latest data for February 2026 showed a decisive drop to 2.6%. This has fundamentally changed the game, shifting the Fed’s stance from hawkishly holding to actively signaling future easing. Current market pricing, reflected in SOFR futures, indicates a greater than 75% probability of a first interest rate cut by the July 2026 FOMC meeting.
Given this, we should consider that the period of high uncertainty in interest rate policy is ending. Volatility in the rates market is likely to decline, making strategies that benefit from this, such as selling options on Treasury or SOFR futures, more attractive. The opportunity now is to position for a more predictable Federal Reserve that is finally poised to begin its cutting cycle in the coming months.
