The worst of the inflation spike may be just around the corner, Morgan Stanley says.
The bank said it expects rising inflation to peak sometime in May or June due to a confluence of factors that are all simultaneously pushing prices higher into the summer months: tariffs, the Iran war, and an ongoing lag in housing inflation measures, according to Michael Gapen, the bank's chief US economist.
Speaking to Bloomberg on Tuesday, Gapen said he believes the US is currently experiencing "peak pressures" with regards to inflation. The actual peak in yearly price growth is likely to come in the following months, he added.
Tariffs: The last bit of inflation from President Donald Trump's tariffs is feeding into core prices, Gapen said, pointing to how the prices of goods, like apparel, were rising.
Core inflation, which excludes volatile food and energy prices, picked up to rise 2.8% year-over-year last month, up from a 2.6% yearly pace in March.
Energy prices: Oil prices have spiked since the start of the Iran war, and a major factor that pushed energy inflation higher in April.
Energy prices soared 17.9% year-over-year last month, accounting for about 40% of the broader inflation number, according to the latest Consumer Price Index. Gas prices in particular were up 28.4% in a year.
Lag in housing inflation: Inflation from shelter costs is seeing a lag from the federal shutdown last fall, Gapen said, referring to how the shutdown paused the government's data collection processes. He referred to the recent acceleration in shelter prices as a "catch-up" effect.
Shelter inflation rose to 0.6% in April, double its pace the prior month, according to the last CPI report.
"You still have kind of a — what I call a trifecta here," Gapen said. "We think the Fed's on the sideline for the rest of this year," he added of the outlook for Fed rate cuts.
The prospect of Fed cuts has been mostly taken off the table this year as inflation has crept higher. Consumer prices surged to a 3.8% yearly pace in April, the hottest inflation has been since 2023, per the Bureau of Labor Statistics.
Markets are pricing in just a 1% chance the Fed will cut rates at all in 2026, down from a 31% chance priced in a month ago, according to the CME FedWatch tool.
