Core inflation in May 2026 (Core CPI YoY)

Market and Federal Reserve projections for future rates diverge significantly. Recent market data, specifically from the December 2025 SOFR futures contract, implies a 3-month SOFR rate of approximately 4.88% for early 2026 ^[1]. This figure reflects traders' collective expectation for the short-term policy rate by the end of 2025. In stark contrast, the Federal Reserve's official 'longer run' federal funds rate projection, as published in its Summary of Economic Projections (SEP), has consistently held a median of 2.6% ^[2].

Market expectations for 2026 policy rates are substantially higher than the Fed's. The current market-implied policy rate expectation for early 2026 thus stands 2.28 percentage points above the Federal Reserve's 'longer run' projection ^[1]. This substantial difference indicates a divergence in outlook between market participants and the Federal Reserve regarding the likely trajectory of interest rates throughout 2024 and 2025, with the market anticipating policy remaining tighter for a longer duration than what the Federal Reserve considers its long-run equilibrium rate.

Annualized wage growth in supercore services consistently exceeded 4.0% in 2025. The Employment Cost Index (ECI) for private industry workers in professional and business services, a key component of the 'supercore' services sector, maintained an annualized wage growth rate above 4.0% throughout 2025. Specifically, growth was 4.2% in the first quarter, rose to 4.6% in the second quarter, peaked at 4.8% in the third quarter, and remained robust at 4.4% in the fourth quarter ^[1]. These figures represent seasonally adjusted annual rates of change from the preceding quarter. Broader private industry service-providing workers also demonstrated strong wage and salary changes, with annualized rates reported around 4.06% in Q1, 4.88% in Q3, and 4.47% in Q4 ^[3].

Consensus forecasts do not project persistent supercore wage growth above 4.0% beyond 2025. The available research does not contain explicit consensus forecasts indicating that ECI wage growth for the 'supercore' services sector will consistently remain above a 4.0% annualized rate past the reported 2025 figures. While economic analyses frequently reference actual wage data and "supercore" inflation, specific forward-looking projections or consensus views on ECI wage growth for service-providing industries persisting above this threshold were not provided in the research ^[2]. Therefore, no explicit consensus forecasts are available to suggest this metric will remain above 4.0% beyond 2025.

Rent growth remained below the critical 3.5% threshold in late 2024. The Zillow Observed Rent Index (ZORI) year-over-year growth rate was 3.3% by December 2024, consistently reported for all homes and multifamily units ^[1]. This rate stayed below the 3.5% re-acceleration threshold during the second half of 2024, indicating no significant increase above that level ^[1].

Softening demand and increased supply moderated rent growth trends. Throughout the summer of 2024, Zillow's rental market reports noted a softening of rental demand and a continued deceleration of annual rent growth, primarily due to an increase in apartment completions ^[3]. By early 2025, rent growth stabilized at the 3.3% rate observed in December 2024 ^[1]. This trend suggests that the disinflationary impulse from housing, as measured by ZORI, was not exhausted by a re-acceleration above 3.5% during the latter half of 2024.

Core goods pricing did not show a structural shift to inflation during 2025. Based on available research, there is no evidence to suggest a structural shift in core goods pricing from deflation to inflation due to onshoring and trade frictions. Specifically, the "Commodities Less Food and Energy Commodities" sub-component did not register a positive year-over-year change for at least three consecutive quarters during 2025. The index for commodities less food and energy actually declined by 0.4 percent in 2025, following a 0.7 percent decline in 2024, indicating that this sub-component remained in deflationary territory on average throughout the year ^[1].

Trade friction impact on consumer prices is generally minor and temporary. Analyses by Federal Reserve banks indicate that the impact of trade frictions, such as tariffs, on consumer prices tends to be relatively small and temporary ^[2], ^[3]. These factors are not considered a major driver of overall goods inflation, which challenges the premise that onshoring and trade frictions were leading to a significant structural inflationary shift in core goods prices during the 2025 period.

Academic and Federal Reserve models face scrutiny over r-star estimates. By mid-2025, these models, particularly the Holston-Laubach-Williams (HLW) model, will likely undergo continued examination regarding their neutral rate of interest (r-star) projections. Historically, the HLW model for the U.S. has indicated a long-run real natural rate of approximately 0.5% to 0.7% in recent years ^[1], ^[2], ^[3]. Economists and policymakers are actively discussing a potentially higher r-star, citing factors such as government spending, productivity, and global capital flows ^[7], ^[8]. However, a definitive revision showing a long-run real neutral rate sustainably above 1.0% remains uncertain based on currently available information.

Understanding r-star is complex, with real-time estimates varying significantly. Real-time calculations of r-star often diverge from ex-post revised estimates. Research published in March 2025, titled "Comparing Apples to Apples: 'Synthetic Real-Time' Estimates of R-Star," highlights these potential differences ^[4], ^[5]. This suggests that real-time indicators might point to an elevated neutral rate as new data emerges, potentially before official model revisions are formally adopted. Federal Reserve officials are continuously assessing r-star's implications for monetary policy, as shown by speeches in 2024 and 2025, such as "R-Star: A Global Perspective" (July 2024) and "Neutral Interest Rates and the Monetary Policy Stance" (August 2025) ^[8], ^[6].

A real neutral rate above 1.0% directly impacts the nominal neutral rate. Should the long-run real neutral rate indeed be revised to sustainably exceed 1.0%, it would directly influence the nominal neutral rate. Assuming the Federal Reserve maintains its 2% inflation target, a real rate sustainably above 1.0% would imply a nominal neutral rate of 3.0% or higher ^[6]. For example, a 1.25% real rate combined with the 2.0% inflation target would result in a 3.25% nominal neutral rate. The evolving consensus surrounding r-star is thus crucial for establishing the appropriate direction and stance of monetary policy ^[9], ^[6].