There are a number of paths inflation could take over the next 12 months, all of which are likely to keep the Fed on hold
The debate over where inflation goes from here is, in many ways, a debate over how long the U.S.-Iran conflict persists and how much of the resulting energy shock passes through to core consumer prices. Our base case sees headline CPI—which rose 3.3% year-over-year in March—climbing to 4.0% by May as the energy shock continues to work its way through prices.
Thereafter, inflation should begin to drift lower, driven by falling oil prices, lower effective tariff rates and a continuing slide in shelter inflation reflecting weaker demographic demand on rents. This could allow CPI to fall to roughly 3.0% year-over-year by December and below 2.0% by April 2027. There are, of course, a number of paths inflation could take over the next 12 months, all of which are likely to keep the Fed on hold. To frame the range of outcomes, we’ve mapped three scenarios for headline CPI, each hinging on a critical variable: how long the current energy shock persists, and how soon oil flows freely through the Strait of Hormuz.
Scenario 1: Re-escalation - Inflation peaks over 5% and remains elevated
The most dangerous outcome would be a re-escalation in which the U.S. militarizes the Strait and Iran goes on the offensive causing broader damage to oil and energy infrastructure in the region. Moreover, with the conflict now entering its third month, this is likely to coincide with a deepening drain on global inventories removing any effective ceiling on oil prices. Under this scenario, crude pushes well above $120/barrel, stays elevated through the summer and only begins to recede in the fourth quarter.
Scenario 2: The 2022 Playbook - Inflation peaks at 4% but declines quickly
The closest historical analog to today is 2022, when Russia’s invasion of Ukraine sent oil prices surging through the first half of the year before reversing sharply. If the current conflict follows a similar arc, mapping the 2022 month-over-month change in energy CPI to today offers a reasonable template. There is, however, an important caveat: in 2022, inflation was already running hot. Russia-Ukraine simply poured gasoline on an inflation fire already burning thanks to the reopening of the global economy and resulting supply chain dislocations. Today’s starting point is much lower, and with demand expected to weaken modestly and disinflationary forces still intact, peak inflation this year should fall well short of 2022’s high.
Scenario 3: Rapid Resolution - Inflation near peak and declines gradually
If diplomacy moves faster than expected and oil prices normalize gradually, headline CPI could revert to the average monthly pace seen in the year ending February 2026. Even in this benign scenario, inflation would still remain above 3.0% through February 2027.
As shown, across all three scenarios, inflation remains stubbornly above the Fed’s 2% target through early 2027. It’s worth mentioning that shelter continues to provide a meaningful disinflationary offset, and it’s also possible that sustained energy prices could trigger some demand destruction, partially countering any further inflation shock. Even so, with the Fed unlikely to ease until data clearly justifies it, rate cuts remain off the table for now.
By Jordan Jackson, Brandon Hall - May 6, 2026