Is Rising Inflation Diminishing Hope for Another Rate Cut?
At the start of the year, developed-market central banks like the Fed, the European Central Bank, and the Bank of England were almost uniformly poised to gradually ease rates.
A lot can change in a quarter.
As seen in the chart below, markets have rapidly repriced the monetary policy outlook in response to the conflict in Iran. What started as an expectation for steady rate cuts in 2026 has shifted the expectation for rate hikes.1
The catalyst behind this repricing is clear. The closure of the Strait of Hormuz has pushed oil and natural gas prices higher, feeding directly into global inflation data. Here in the U.S., March’s Consumer Price Index (CPI) report showed headline inflation rising 3.3% year-over-year, a sharp increase from February’s 2.4% pace, with energy prices up 12.5% and gasoline alone jumping nearly 19%. As seen on the chart below, there’s a sharp divergence in inflation data when it includes energy prices (headline), versus when it’s stripped out (core).
Consumer Price Index, January 2024 – March 2026 (blue line is headline, green line is core)
The gap in the chart seen above is important. While headline inflation jumped, core CPI rose a lesser 2.6% year-over-year, which was slightly below expectations. Food prices were largely flat, and many goods categories showed limited pass-through from higher energy costs. In other words, it’s clear that inflation pressure is not broad-based at this stage.
This is an important distinction when considering monetary policy in the U.S. versus abroad. In Europe and the U.K., central banks operate under more explicitly inflation-focused mandates and economies are more exposed to energy costs. The U.S. jobs market is equally important to the Fed, and our economy is far less exposed, given we’re a net exporter of oil and gas. That’s why I think the market pricing-in Fed hikes in 2026 is premature and likely off-base.
To be sure, a prolonged period of elevated energy prices could justify keeping rates higher for longer, delaying the timing of rate cuts. But despite a meaningful shift in underlying inflation dynamics or expectations, the bar for renewed rate hikes remains high, in my view. In that sense, markets may be interpreting a change in timing as a change in direction. That would make a potential rate cut in 2026 a positive surprise, which I see as a net positive for stocks.
My conviction on this point comes from looking at market-based measures such as 5- and 10-year breakeven rates, which continue to hover in the low-to-mid 2% range. And I’d also cite money supply growth, which has returned to a much more modest pace and is broadly in line with pre-pandemic trends.
5-Year Breakeven Inflation Rate (blue) and 10-Year Breakeven Inflation Rate (green)
M2 Money Supply (Year-Over-Year Change in $ Billions, 2016 – 2026)
Investors should keep in mind that not every inflation spike carries the same policy implications. A rise in headline CPI driven by energy is very different from a broad, demand-led acceleration in prices, and central banks, and especially the Federal Reserve, know that. That is why I think the Fed is more likely to treat the latest inflation data as a reason for caution, not a reason to reverse course. Other developed-market central banks may have less room to look through the shock, but in the U.S., the more likely policy shift is a delay to easing, not the start of a new hiking cycle.
Bottom Line for Investors
Even if markets continue to debate the path of monetary policy, the bigger story for investors may be that the economy appears less dependent on near-term Fed decisions than many assume. S&P 500 earnings are expected to grow to +13.1% in Q1 on +9% higher revenues, with early reports showing +76.6% earnings growth and strong beat rates. Remember that this strength has emerged even as the Fed has taken a relatively limited role in actively supporting growth.
Looking ahead, policy expectations may continue to shift, but underlying drivers of markets like earnings, demand, and corporate fundamentals continue to look strong, regardless of what action central banks take in the near term.
In environments like this, staying aligned with a long-term plan matters more than reacting to short-term changes.
Our free guide, The Power of Financial Planning with Zacks Investment Management6, outlines how to navigate shifting rate and inflation expectations—and what to consider as you build a more complete financial plan, including:
- Investment Planning
- Retirement Income Planning
- Cash Flow and Budgeting
- Tax and Insurance Planning
- Insurance Planning
- Estate Planning
- …and other topics
If you have $500,000 or more to invest, download our guide, The Power of Financial Planning with Zacks Investment Management6 for a closer look at how a thoughtful plan can help you stay focused and aligned with your long-term goals.
Disclosure
2 ZIM may amend or rescind the free guide “The Power of Financial Planning with Zacks Investment Management” for any reason and at ZIM’s discretion.
3 Fred Economic Data. April 10, 2026. https://fred.stlouisfed.org/series/CPIAUCSL
4 Fred Economic Data. April 10, 2026. https://fred.stlouisfed.org/series/EXPINF5YR
5 Fred Economic Data. March 24, 2026. https://fred.stlouisfed.org/series/WM2NS
6 ZIM may amend or rescind the free guide “The Power of Financial Planning with Zacks Investment Management” for any reason and at ZIM’s discretion.
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