US Week Ahead: Inflation likely to hit a three-year high in May
The desk anticipates that the upcoming inflation data will reinforce concerns about persistent price pressures in the U.S., as RBC forecasts a headline inflation increase of +0.5% m/m in May, leading to an annualized inflation rate of 4.2%. This continues to be driven largely by higher energy costs, with core inflation expected to rise as well, albeit at a slower rate of +0.3% m/m to 2.9%. Per the full note by RBC Economics, this scenario poses challenges for the Federal Reserve, which seeks to manage inflation expectations without derailing economic growth, especially given the labor market's robust performance in recent reports. As traders prepare for potential volatility in response to these figures, they should closely monitor the implications for policy direction and currency valuations.
What the desk is arguing
The upcoming inflation data is expected to highlight continued pressure on prices, with RBC projecting a headline CPI increase of +0.5% m/m for May. This aligns with a broader trend of climbing prices, driven by energy and food sectors, which are forecasted to keep inflation elevated throughout the summer months. The desk frames this as a potential catalyst for further Fed tightening if inflationary trends persist and labor market strength continues, suggesting traders remain vigilant regarding Fed policy shifts.
RBC notes that Johnson manufacturers and service firms are passing on input costs, indicated by a +0.6% m/m increase in both headline and core PPI for May, raising prices to a 6.3% y/y growth for headline and 5.5% for core. This suggests that businesses feel emboldened to set higher prices due to sustained demand, compelling the Fed to consider tighter monetary policy to combat inflation as unemployment continues to hold relatively low at around 172K new jobs.
In contrast to bearish indicators, strong job growth may provide a cushion against severe economic contraction, contradicting fears of widespread layoffs, thereby supporting consumer spending. The alternative read would be that if inflation starts to cool alongside easing energy prices, the Fed may adopt a more dovish stance posturing less aggressive rate hikes this year, an outlook that seems less likely given the robust inflation predictions from RBC.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01RBC forecasts May headline CPI to increase by +0.5% m/m, resulting in a year-over-year rate of 4.2%.
- 02Core inflation is expected to rise by +0.3% m/m to 2.9%, well below headline rates but concerning for Fed policy.
- 03Strong job creation (172K) highlights potential resilience in the economy, yet maintaining inflation control may require Fed action.
- 04Manufacturers retain pricing power, as shown by +0.6% m/m projected rise in PPI for both headline and core.
Market implications
Traders should focus on the potential impacts of rising inflation rates on Fed policy sentiment, especially if CPI prints align with RBC's forecast. Watch for significant currency movements around the release of inflation data to gauge market sentiment regarding interest rate adjustments. A sustained uptick in inflation may bolster USD strength against peers.
Risks to this view
A primary risk to this outlook includes a significant drop in oil prices, which could lessen upward pressures on inflation. Additionally, an unexpected downturn in employment growth or signaled dovishness from the Fed could lead to a rapid reevaluation of market positions, potentially reversing trends.
RBC Royal Bank View Online US Week Ahead: Inflation likely to hit a three-year high in May Next week, all eyes will be on inflation data, and we do not expect that it will be a reassuring development. We forecast headline to increase +0.5% m/m in May, which will bring the year-over-year pace to 4.2%. Higher energy prices continue to push headline inflation up.
And we do not expect to see a meaningful reprieve in the food space either, especially following recent headlines about beef prices. Our forecast for core calls for a +0.3% m/m uptick in May, which would nudge the year-over-year pace to 2.9% - well below headline but moving in the wrong direction for the Fed. Higher jet fuel prices will continue to add to core services, while tight labor markets which keep a floor under wage growth are limiting core services disinflation.
And core goods inflation has been helped in recent months by new and used car prices, which are masking price pressures for trade-exposed products like apparel, personal care products, and motor vehicle parts. Both ISM manufacturing and services surveys highlighted soaring input costs. And recent PPI data suggests that firms do have the pricing power to pass off these higher input costs.
In May, we expect producers continued to pass off higher input prices. We anticipate that we will see a +0.6% m/m increase in both headline and core PPI – bringing the headline pace of growth up to +6.3% y/y and core at +5.5% y/y respectively. The April NFIB survey highlighted a spike in firms (nearly 30%) anticipating that they will raise prices within the next three months, which suggests that passthrough will continue through the summer months.
This is bad news for consumers but good news for the labor market. If firms have sufficient pricing power to preserve margins by passing off higher input costs, there are unlikely to be mass layoffs. And the May jobs report showed net new job creation continued (to the tune of 172K).
An unemployment rate that is stable at exceptionally low levels (4.3%) is reassuring, but a stable job market will come at the expense of consumer budgets. For now, households have been saving less to accommodate higher prices in other areas. Aside from inflation data, here’s what else we’re watching: - Our forecast calls for existing home sales to come in at 4.01 million for the month of May.
Home sales are expected to remain sluggish, as the mortgage backdrop continues to weigh on affordability. - We anticipate that initial jobless claims will rise to 232k for the week ending June 6th. We anticipate that initial jobless claims could moderate in the coming weeks, but will still likely remain at exceptionally low levels. Continued claims have largely ticked lower on a four-week moving average basis since November.
Read Report Mike Reid Head of US Economics | Royal Bank of Canada | 212-437-2434 Carrie Freestone Senior US Economist | Royal Bank of Canada | 551-697-5814 Imri Haggin US Economist | Royal Bank of Canada For more economic research, visit rbc.com/economics . - Privacy & Security | Legal | Unsubscribe - RBC Royal Bank | Royal Bank of Canada 200 Bay Street, South Tower, 9th Floor, Toronto, ON M5J 2J2, Canada | (R)/TM Trademark(s) of Royal Bank of Canada. RBC is a registered trademark of Royal Bank of Canada. (c) Royal Bank of Canada 2026 To manage your email preferences, please visit our Subscription Preferences Centre.
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