Economists have raised their inflation expectations for the United States and pushed back their projections for the timing of the Federal Reserve's next interest rate cut, as price pressures stemming from the conflict in Iran begin to spread from energy costs to broader sectors.
The latest survey of economists indicates that the Personal Consumption Expenditures (PCE) price index is now expected to rise by 3.9% year-on-year in the second quarter, up from the 3.6% forecast last month. Economists have also revised upward their inflation forecasts for each quarter through early 2027.
The core PCE measure, which excludes food and energy prices, is also anticipated to increase more than previously expected. Both the overall and core PCE indices are projected to remain above 3% by year-end. Regarding a potential Fed rate cut in December, respondents are currently evenly split, whereas in the previous survey, a majority expected the next cut to occur in October.
The conflict in Iran is reigniting inflationary pressures, placing additional strain on consumers already dissatisfied with high living costs. As the conflict persists, some central bank officials are beginning to question whether they can continue to overlook this round of price shocks.
"The situation feels like a replay of history," said Luke Tilley, Chief Economist at Wilmington Trust. "The Fed and markets are concerned that surging energy prices could fuel inflation, much like last year's worries about tariffs driving up costs." He added, "With consumers already showing signs of weakness, they are more likely to cut spending in other areas as fuel costs rise."
The survey shows that economists still expect U.S. consumer spending and GDP growth to be around 2% this year, largely consistent with prior forecasts. The probability of the U.S. economy entering a recession within the next 12 months has decreased to 25%.
A key question moving forward is whether the conflict will lead to a slowdown in hiring. Tax cuts are currently supporting consumer spending and business investment. However, if household demand weakens or corporate input costs continue to rise, companies may adjust their strategies by reducing work hours or cutting jobs.
Economists have slightly raised their expectations for nonfarm payroll growth this year but still anticipate the unemployment rate to peak at 4.5% in the third quarter. The survey was conducted from May 15 to 20 and included responses from 88 economists.
Comments