On the eve of PCE data release: Structural shifts in energy shocks and persistent high inflation become the new reality?
2026-05-27 19:17:09
The U.S. core personal consumption expenditures price index for April, to be released on Thursday (May 28), is far more than just a routine monthly data update. It is a crucial test of whether the current geopolitical conflict in the Middle East can transcend the boundaries of a "one-off shock" and penetrate into a broader economic structure, and also an important signal of whether the Federal Reserve needs to reassess its interest rate path.
Market consensus and the Cleveland Fed's real-time forecasting model both indicate that the US core personal consumption expenditure price index (PCE) for April is expected to remain around 3.2% year-on-year, unchanged from March; the month-on-month increase is expected to be around 0.29% to 0.30%, or about 3.5% annualized, well above the Fed's 2% policy target. Overall, due to continued rising oil prices, the figure may rise to the 3.3% to 3.8% range.
If core stickiness exceeds expectations, or the energy transmission effect is significantly stronger than market expectations, the policy pricing of "higher interest rates for a longer period of time" will be further strengthened, and the market will significantly postpone its expectations for the timing of interest rate cuts.
Historical Comparison: Why This Inflation Isn't "Temporary"
Over the past few decades, every oil price supply shock—whether it was the Gulf War, the Iraq War, or the 2011 Arab Spring—has sparked the same debate among economists and central bank policymakers: is it temporary or permanent? History has ultimately proven the "temporary narrative" time and again: as oil-producing countries increase production, global demand adjusts, and alternative energy sources emerge, oil prices fall, and inflationary pressures subside.
However, the current situation is disrupting this historical logic in multiple ways. The risks associated with the Strait of Hormuz have given rise to a "service fee" mechanism—Iran charges oil tankers passing through the strait a so-called "navigation, safety, and environmental service fee," which systematically increases global oil shipping insurance and logistics costs. Even if the conflict de-escalates temporarily, this fee mechanism is gradually evolving into a lasting structural cost for the supply chain, affecting approximately 20% of global oil trade.
At the same time, rising tariff barriers, accelerated deglobalization of industrial chains, labor market constraints brought about by tightened immigration policies, and the new high-energy-consuming demand created by the construction of large-scale artificial intelligence data centers together constitute a multi-layered structural foundation that was not present in previous pure supply shocks.
Academic research shows that the impact of traditional oil price supply shocks on inflation typically subsides significantly within one to two years, with relatively limited penetration into core inflation. However, the current combination of multiple structural factors makes it easier for energy prices to penetrate core inflation sectors—such as services, transportation, and housing—in a sustained manner, rather than merely remaining at the level of short-term fluctuations in the overall index.
A profound comparison with the oil price shock of the 1970s
The oil crises of 1973 and 1979 are the most widely cited historical examples to date. OPEC's embargo caused oil prices to quadruple, and loose monetary policy exacerbated the situation. The wage indexation mechanism created an automatic transmission mechanism, and inflation expectations completely lost their anchor, ultimately leading to severe stagflation. Then-Federal Reserve Chairman Volcker used a benchmark interest rate of nearly 20% to bring down inflation, but at the cost of a deep economic recession.
The similarities between this round and the 1970s lie in the fact that geopolitical supply shocks are superimposed on existing inflationary pressures, leading to an upward shift in long-term consumer inflation expectations. The potential risks of a wage-price spiral also exist, and the transmission path of energy prices to the overall economy is quite similar.
However, key differences cannot be ignored: the current economy's dependence on oil has decreased significantly, and improved energy efficiency and diversification have weakened the transmission of shocks; the wage indexation mechanism in the labor market is far less rigid than it was back then; the Fed's inflation target framework is more mature, and long-term inflation expectations are still relatively anchored overall, although there have been signs of upward movement; and this round of shocks occurred against the backdrop of a policy tightening cycle, not in an era of extreme monetary easing.
In summary, this shock is unlikely to completely replicate the extreme stagflation of the 1970s, but its structural components make inflation far more sticky than any purely supply-side shock in history, resembling a "mild but persistent structural pressure." The Federal Reserve's traditional strategy of "ignoring and waiting for it to subside" is facing a severe test.
Public warnings from Federal Reserve officials
The Federal Reserve is highly concerned about the persistence of inflation. The minutes of the March Federal Open Market Committee meeting showed that most participants believed that if inflation persists above the 2% target, "further tightening of policy may be an appropriate option." They were particularly concerned that the persistent impact of energy prices could further push up core inflation through rising input costs, and cause overall inflation to fall more slowly than previously expected.
The current energy shock, combined with previous price shocks such as tariffs, may have an effect similar to the continuous shock pattern during the pandemic. Standard ignoring strategies may become completely ineffective under the combined effect of multiple shocks.
—A public speech by Federal Reserve Governor Christopher Waller
At the institutional level, the Peterson Institute for International Economics believes that the upside risk of inflation exceeding 4% in 2026 is significantly higher than the baseline scenario, driven by the reinforcing forces of five factors: tariff shocks, expanding fiscal deficits, labor constraints, energy bottlenecks, and upward shifts in inflation expectations.
Major investment banks such as Morgan Stanley also regard structural high inflation as a kind of "new normal". The International Monetary Fund and professional forecasting agencies have also raised their recent inflation expectations, mainly due to the second-round transmission effect of the energy shock.
Consumers' Real Feelings: The Warmth of the People Behind the Data
Beyond macroeconomic data, consumer surveys are delivering more direct market signals. The University of Michigan's final consumer sentiment index for May fell to 44.8, a multi-decade low, compared to 49.8 previously. One-year inflation expectations rose slightly to 4.8%, while long-term expectations for 5 to 10 years climbed to 3.9%, with the latter's continued rise being particularly noteworthy.
More importantly, a remarkable 57% of respondents spontaneously mentioned in open-ended questions that "high prices are eroding personal finances." The impact of rising oil prices has spread from fuel to broader sectors such as food, transportation, and services, with low-income groups feeling the effects particularly strongly. As consumers' long-term inflation expectations remain at 3.9%, rational wage negotiations will inevitably begin to reflect this expectation—the threshold for the wage-price spiral to evolve from theoretical risk into real pressure is quietly decreasing.
Asset Impact: High oil prices may represent a new equilibrium, leaving gold in a dilemma.
From an asset allocation perspective, the structural shift in this round of inflation will profoundly reshape the risk-return framework of various assets. Regarding oil prices, the Iranian service fee mechanism, the ongoing risks of the Hormuz corridor, and global energy bottlenecks will collectively support high oil prices for an extended period. Even if geopolitical conflicts ease temporarily, the recovery of supply will be much slower than before. High oil prices will continue to be transmitted to a broader price system through channels such as transportation and production costs—roughly estimating a $10 increase per barrel, this could contribute an additional 0.2 percentage points of inflationary pressure, and the cumulative effect cannot be ignored.
Regarding gold, geopolitical safe-haven demand and long-term allocation needs continue to provide some support for gold prices. However, the combination of persistent high inflation coupled with a longer period of higher interest rates will impose a significant opportunity cost constraint on gold. High real yields, a relatively strong dollar, and a cautious Federal Reserve policy will systematically suppress the upside potential of gold prices. Although current gold prices are at historical highs, the sustainability of these extreme highs faces a severe test in the context of a prolonged high-interest-rate environment, and the trading range may further widen.
Key conclusions
If tomorrow's core personal consumption expenditures price index shows stronger-than-expected stickiness, or if the transmission of energy prices to the service sector is significantly stronger than predicted, the window for a Fed rate cut will be further delayed, and the market's pricing in "higher interest rates for a longer period" will be strengthened. The core challenge of this round of inflation lies in the fact that its driving force has upgraded from a simple energy supply shock to a systemic pressure intertwined with geopolitical structures, supply chain restructuring, and expectation mechanisms. This significantly narrows the applicability of the historically effective "ignore and wait for it to subside" strategy. The Fed's core dilemma is finding a balance between economic growth pressures and inflation persistence—the former does not support proactive rate hikes, while the latter does not allow for premature easing. The "wait and see, act on data" stance will be further strengthened, but policy flexibility is continuously narrowing.
Market consensus and the Cleveland Fed's real-time forecasting model both indicate that the US core personal consumption expenditure price index (PCE) for April is expected to remain around 3.2% year-on-year, unchanged from March; the month-on-month increase is expected to be around 0.29% to 0.30%, or about 3.5% annualized, well above the Fed's 2% policy target. Overall, due to continued rising oil prices, the figure may rise to the 3.3% to 3.8% range.
If core stickiness exceeds expectations, or the energy transmission effect is significantly stronger than market expectations, the policy pricing of "higher interest rates for a longer period of time" will be further strengthened, and the market will significantly postpone its expectations for the timing of interest rate cuts.
Historical Comparison: Why This Inflation Isn't "Temporary"
Over the past few decades, every oil price supply shock—whether it was the Gulf War, the Iraq War, or the 2011 Arab Spring—has sparked the same debate among economists and central bank policymakers: is it temporary or permanent? History has ultimately proven the "temporary narrative" time and again: as oil-producing countries increase production, global demand adjusts, and alternative energy sources emerge, oil prices fall, and inflationary pressures subside.
However, the current situation is disrupting this historical logic in multiple ways. The risks associated with the Strait of Hormuz have given rise to a "service fee" mechanism—Iran charges oil tankers passing through the strait a so-called "navigation, safety, and environmental service fee," which systematically increases global oil shipping insurance and logistics costs. Even if the conflict de-escalates temporarily, this fee mechanism is gradually evolving into a lasting structural cost for the supply chain, affecting approximately 20% of global oil trade.
At the same time, rising tariff barriers, accelerated deglobalization of industrial chains, labor market constraints brought about by tightened immigration policies, and the new high-energy-consuming demand created by the construction of large-scale artificial intelligence data centers together constitute a multi-layered structural foundation that was not present in previous pure supply shocks.
Academic research shows that the impact of traditional oil price supply shocks on inflation typically subsides significantly within one to two years, with relatively limited penetration into core inflation. However, the current combination of multiple structural factors makes it easier for energy prices to penetrate core inflation sectors—such as services, transportation, and housing—in a sustained manner, rather than merely remaining at the level of short-term fluctuations in the overall index.
A profound comparison with the oil price shock of the 1970s
The oil crises of 1973 and 1979 are the most widely cited historical examples to date. OPEC's embargo caused oil prices to quadruple, and loose monetary policy exacerbated the situation. The wage indexation mechanism created an automatic transmission mechanism, and inflation expectations completely lost their anchor, ultimately leading to severe stagflation. Then-Federal Reserve Chairman Volcker used a benchmark interest rate of nearly 20% to bring down inflation, but at the cost of a deep economic recession.
The similarities between this round and the 1970s lie in the fact that geopolitical supply shocks are superimposed on existing inflationary pressures, leading to an upward shift in long-term consumer inflation expectations. The potential risks of a wage-price spiral also exist, and the transmission path of energy prices to the overall economy is quite similar.
However, key differences cannot be ignored: the current economy's dependence on oil has decreased significantly, and improved energy efficiency and diversification have weakened the transmission of shocks; the wage indexation mechanism in the labor market is far less rigid than it was back then; the Fed's inflation target framework is more mature, and long-term inflation expectations are still relatively anchored overall, although there have been signs of upward movement; and this round of shocks occurred against the backdrop of a policy tightening cycle, not in an era of extreme monetary easing.
In summary, this shock is unlikely to completely replicate the extreme stagflation of the 1970s, but its structural components make inflation far more sticky than any purely supply-side shock in history, resembling a "mild but persistent structural pressure." The Federal Reserve's traditional strategy of "ignoring and waiting for it to subside" is facing a severe test.
Public warnings from Federal Reserve officials
The Federal Reserve is highly concerned about the persistence of inflation. The minutes of the March Federal Open Market Committee meeting showed that most participants believed that if inflation persists above the 2% target, "further tightening of policy may be an appropriate option." They were particularly concerned that the persistent impact of energy prices could further push up core inflation through rising input costs, and cause overall inflation to fall more slowly than previously expected.
The current energy shock, combined with previous price shocks such as tariffs, may have an effect similar to the continuous shock pattern during the pandemic. Standard ignoring strategies may become completely ineffective under the combined effect of multiple shocks.
—A public speech by Federal Reserve Governor Christopher Waller
At the institutional level, the Peterson Institute for International Economics believes that the upside risk of inflation exceeding 4% in 2026 is significantly higher than the baseline scenario, driven by the reinforcing forces of five factors: tariff shocks, expanding fiscal deficits, labor constraints, energy bottlenecks, and upward shifts in inflation expectations.
Major investment banks such as Morgan Stanley also regard structural high inflation as a kind of "new normal". The International Monetary Fund and professional forecasting agencies have also raised their recent inflation expectations, mainly due to the second-round transmission effect of the energy shock.
Consumers' Real Feelings: The Warmth of the People Behind the Data
Beyond macroeconomic data, consumer surveys are delivering more direct market signals. The University of Michigan's final consumer sentiment index for May fell to 44.8, a multi-decade low, compared to 49.8 previously. One-year inflation expectations rose slightly to 4.8%, while long-term expectations for 5 to 10 years climbed to 3.9%, with the latter's continued rise being particularly noteworthy.
More importantly, a remarkable 57% of respondents spontaneously mentioned in open-ended questions that "high prices are eroding personal finances." The impact of rising oil prices has spread from fuel to broader sectors such as food, transportation, and services, with low-income groups feeling the effects particularly strongly. As consumers' long-term inflation expectations remain at 3.9%, rational wage negotiations will inevitably begin to reflect this expectation—the threshold for the wage-price spiral to evolve from theoretical risk into real pressure is quietly decreasing.
Asset Impact: High oil prices may represent a new equilibrium, leaving gold in a dilemma.
From an asset allocation perspective, the structural shift in this round of inflation will profoundly reshape the risk-return framework of various assets. Regarding oil prices, the Iranian service fee mechanism, the ongoing risks of the Hormuz corridor, and global energy bottlenecks will collectively support high oil prices for an extended period. Even if geopolitical conflicts ease temporarily, the recovery of supply will be much slower than before. High oil prices will continue to be transmitted to a broader price system through channels such as transportation and production costs—roughly estimating a $10 increase per barrel, this could contribute an additional 0.2 percentage points of inflationary pressure, and the cumulative effect cannot be ignored.
Regarding gold, geopolitical safe-haven demand and long-term allocation needs continue to provide some support for gold prices. However, the combination of persistent high inflation coupled with a longer period of higher interest rates will impose a significant opportunity cost constraint on gold. High real yields, a relatively strong dollar, and a cautious Federal Reserve policy will systematically suppress the upside potential of gold prices. Although current gold prices are at historical highs, the sustainability of these extreme highs faces a severe test in the context of a prolonged high-interest-rate environment, and the trading range may further widen.
Key conclusions
If tomorrow's core personal consumption expenditures price index shows stronger-than-expected stickiness, or if the transmission of energy prices to the service sector is significantly stronger than predicted, the window for a Fed rate cut will be further delayed, and the market's pricing in "higher interest rates for a longer period" will be strengthened. The core challenge of this round of inflation lies in the fact that its driving force has upgraded from a simple energy supply shock to a systemic pressure intertwined with geopolitical structures, supply chain restructuring, and expectation mechanisms. This significantly narrows the applicability of the historically effective "ignore and wait for it to subside" strategy. The Fed's core dilemma is finding a balance between economic growth pressures and inflation persistence—the former does not support proactive rate hikes, while the latter does not allow for premature easing. The "wait and see, act on data" stance will be further strengthened, but policy flexibility is continuously narrowing.
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