UBS Forecasts U.S. April CPI to Surge to 3.8%

Overview

UBS’s April U.S. CPI outlook report released this week points out that U.S. inflation is facing a new round of upward pressure. The report forecasts that April overall CPI will surge by 0.62% month-on-month, reaching 3.8% year-on-year; core CPI will rise by 0.41% month-on-month, climbing to 2.77% year-on-year. This significant increase is mainly driven by soaring energy prices such as gasoline, as well as a concentrated rebound in housing rents that had been delayed due to previous government shutdowns. Looking ahead to May, with gasoline prices continuing to rise, overall CPI could further climb to a yearly peak of 4.3%. The report also warns that inflationary risks remain elevated in the second half of the year.

Core views

UBS holds a clearly hawkish view on short-term inflation trends, believing that U.S. CPI will experience consecutive sharp rises in April and May. Overall inflation level: April CPI is forecast to rise by 0.62% month-on-month (seasonally adjusted), adding up to 0.87% in March, marking the largest two-month consecutive increase since 2022. The 12-month overall CPI inflation rate is expected to climb from 3.3% in March to 3.8% in April, becoming the first year-on-year reading unaffected by base effects since the government shutdowns last October-November. One of the major drivers is the projected 6% month-on-month rise (seasonally adjusted) in gasoline and other energy prices. Additionally, housing rents that were not counted during the October government shutdown have been postponed until April, causing a concentrated rebound in OER (Owner’s Equivalent Rent) and tenant rents. Core inflation level: April core CPI is forecast to rise by 0.41% month-on-month, the largest increase since January last year, significantly higher than the 0.24% a year ago. Core non-transportation goods prices continue to rise under the gradual pass-through effect of tariffs, expected to rise another 0.31% month-on-month, pushing the 12-month increase to 2.44%. By contrast, used car prices are expected to decline for the fifth consecutive month. Core PCE level: Affected by weight distribution, April core PCE price increase is forecast at 0.29%, lower than core CPI. Since housing rents account for only about half the weight of CPI in PCE, the weak housing rents and used cars in CPI exert less drag on PCE. However, core PCE will still climb from 3.20% in March to 3.31% year-on-year. May Outlook and Medium-Term Risks: Overall CPI in May is forecast to rise another 0.53% month-on-month, reaching 4.3% year-on-year, possibly hitting a yearly peak. UBS believes that inflation risks in the second half of the year lean toward the upside, mainly due to persistently high international oil prices, ongoing tariff pass-through effects, and cost increases driven by AI technology. If Brent crude oil prices stay around $150 per barrel for most of the remainder of this year, it could push the full-year 2026 overall CPI inflation above 5%.

Analysis framework

UBS’s analysis combines top-down and bottom-up approaches, forecasting ahead by breaking down CPI components item by item. In energy and food analysis, the research team closely tracks high-frequency retail data. For example, comparing AAA’s weekend average gasoline price ($4.45/gallon) with April’s average ($4.12/gallon), they judge that energy prices will remain under pressure in May; meanwhile, using high-frequency retail price data from grocery stores, pharmacies, and convenience stores to forecast food inflation trends. In housing rent analysis, the team focuses on statistical backlogs caused by government disruptions, using leading indicators such as new tenant rents to judge that long-term rental inflation trends are easing, but also identifies a short-term rebound in April due to the catch-up effect. In core goods analysis, the team cross-validates with Adobe online price data and JD Power used car guides to assess the tariff pass-through effect. By comparing the differences in weighting between CPI and PCE, they logically conclude that core PCE will be lower than core CPI.

Methodology notes

• Industry/Industrial Analysis FrameworkQuantity-Price Decomposition

  CPI Component Decomposition and High-Frequency Data Mapping

  Breaking down overall CPI into components such as energy, food, core goods, and core services, and combining them with high-frequency data (such as AAA gasoline prices, Nielsen retail data, Adobe online prices, etc.) to forecast ahead. This report extensively uses this method, deriving overall inflation levels through price changes and weights of each component.

• Macroeconomic framework

  Analysis of Weight Differences Between CPI and PCE Indices

  CPI and PCE are the two major indicators measuring U.S. inflation. Due to their different weightings for components like housing rents and used cars, their trends diverge. The report notes that housing rents account for about half the weight of CPI in PCE, so when housing rents surged in April, the boost to PCE was smaller than to CPI.

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Supply Chain Transmission

  Tariff Pass-Through Effect

  After import tariffs are raised, costs gradually pass through the supply chain to end consumers, driving up core goods prices. The report points out that the tariff pass-through effect keeps core non-transportation goods prices rising, and this impact will continue for months to come.

Key data

• April Overall CPI Month-on-Month (Seasonally Adjusted)0.62%Forecasted value, higher than Nowcast team’s 0.21%, close to Bloomberg consensus of 0.33%
• April Overall CPI Year-on-Year3.8%Forecasted value, higher than March’s 3.3% and January-February’s 2.4%
• April Core CPI Month-on-Month (Seasonally Adjusted)0.41%Forecasted value, strongest increase since January last year
• April Core CPI Year-on-Year2.77%Forecasted value, higher than March’s 2.60% and February’s 2.46%
• April Core PCE Month-on-Month0.29%Forecasted value, lower than core CPI’s 0.41%
• May Overall CPI Year-on-Year4.3%Forecasted value, expected to be a yearly peak
• April Gasoline Price (Month-on-Month, Seasonally Adjusted)6%Projected increase for energy goods; unadjusted increase was 11%
• Weekend Average Gasoline Price$4.45/gallonAAA data, significantly higher than April’s average of $4.12/gallon

Impact & implications

The report believes that the strong performance of U.S. inflation in April and May will have significant implications for macroeconomic expectations. If inflation continues to rise, it will reinforce market expectations that the Federal Reserve will maintain high interest rates. Moreover, the rise in core non-transportation goods prices indicates that the tariff policy’s pass-through effect is substantially pushing up consumer prices. If international crude oil prices rise further, the full-year 2026 inflation rate could exceed 5%. Overall, short-term inflation pressures in the U.S. have significantly increased.

Risks

• The rebound in housing rents may fall short of expectations, posing the biggest downside risk to core CPI
• The transmission of rising aviation fuel prices to airfares may concentrate more in April than expected, constituting an upside risk
• Sampling issues over the past year have led to a wide forecast range for CPI (core CPI month-on-month between 0.28% and 0.47% is not surprising)
• Second-half inflation risks include: persistently high crude oil prices, ongoing tariff pass-through, and cost increases driven by AI applications
• If Brent crude oil prices stay around $150 per barrel for the rest of the year, it could push the full-year 2026 overall CPI above 5%

What to watch

• The upcoming April Adobe online price data (which may revise core goods inflation forecasts)
• S&P Global U.S. Consumer Services Output Price Diffusion Index and airfare data
• Daily trend of gasoline prices (affecting energy goods inflation in May)