U.S. underlying inflation remains range-bound but firm, with rising upside risk to rates

Overview

This report focuses on the U.S. inflation and rates outlook. Deutsche Bank believes progress in U.S. disinflation has stalled, and underlying inflation indicators remain well above the Fed's 2% target. Although the monthly pace of core PCE slowed slightly in April, the YoY reading continued to rise to 3.29%, and multiple trend inflation models indicate inflation pressure remains elevated.

Core views

The core view is that U.S. inflation is not merely being driven by a few idiosyncratic components, but reflects broader and more persistent price pressures. Goods inflation, especially in durables and recreation goods, remains resilient, while the contribution from services inflation is roughly near pre-pandemic levels, though housing and rents remain noisy. The report maintains its base case that the Fed stays on hold for an extended period, while emphasizing that the risk of renewed hikes has risen if inflation cannot return to a more sustainable 2% path.

Analysis framework

The report assesses trend inflation by updating its underlying inflation dashboard, combining indicators such as core PCE, trimmed mean PCE, Cleveland Fed median PCE, the NY Fed multivariate core trend measure, inflation expectations, and Phillips curve models, while also examining components including goods, services, housing, rent, and supercore inflation to judge the breadth and persistence of inflation pressures.

Methodology notes

• Trend inflation measurementUnderlying inflation dashboard

  Uses multiple underlying inflation models to measure the inflation trend after excluding short-term noise.

  Updated through April 2026 data, the monthly median held at 3.1% and the monthly average rose to 3.2%, indicating that disinflation progress has stalled.

• PCE inflation distribution indicatorsTrimmed mean PCE and median PCE

  Assesses underlying price pressure by dampening extreme price moves or observing the median component.

  Trimmed mean PCE held at 2.4% YoY, and Cleveland Fed median PCE fell 4bps to 2.8%, but the report notes that the low trimmed mean reading may understate the true trend.

• Model-based trend inflationNY Fed multivariate core trend measure and Phillips curve model

  Uses multivariate trend models together with variables such as inflation expectations and economic slack to estimate underlying inflation.

  The NY Fed multivariate core trend measure rose 53bps in April to 4%; University of Michigan inflation expectations rose 30bps to 3.5%, pushing the Phillips curve model estimate up to 4.1%.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• U.S. policy rates and U.S. Treasuries

  Sticky inflation raises the risk of higher-for-longer rates and potential rate hikes.

  Strengths

  If investors hold instruments linked to short-end rates or inflation, they may be better hedged against rising inflation and rates.

  Weaknesses

  Long-duration fixed-rate bonds are more sensitive to rising discount rates, and inflation surprises could create valuation pressure.

  Comparison

  Compared with a single core PCE reading, the report places greater emphasis on a multi-indicator trend inflation framework because it shows broader price pressures.

  Risks

  Rising inflation, fiscal financing pressure, U.S. dollar or FX volatility, and a renewed upward adjustment in policy rates.

• Inflation-linked bonds and floating-rate instruments

  They offer some hedging characteristics in an environment of rising inflation and rates.

  Strengths

  Cash flows are linked to inflation or short-end rates, which can partly mitigate the erosion of real returns on fixed-rate assets.

  Weaknesses

  The index or reference rate may lag or fail to accurately reflect actual inflation pressure.

  Comparison

  Relative to plain fixed-rate bonds, they have lower direct exposure to inflation shocks.

  Risks

  Inflation index mismatch, liquidity changes, rising real rates, and market repricing.

Key data

• Core PCE inflationAbout 24bps MoM in April, 3.29% YoYThe YoY reading rose 5bps from the prior period and extended the uptrend seen since the start of the year.
• Monthly median of underlying inflation3.1%Unchanged from the prior period, indicating inflation stickiness remains strong.
• Monthly average of underlying inflation3.2%Rose 10bps in April.
• Q1 trend inflationBoth average and median were 2.9%The quarterly average rose 8bps and the quarterly median rose 16bps.
• Durable goods pricesUp 58bps in AprilThe persistence of goods inflation remains evident.
• Recreation goods and other durable goods+1.61% and +1.0% MoM, respectivelyMonthly inflation in recreation goods was near a ten-year high.
• Services inflation contribution17bpsIts contribution to monthly core inflation was roughly close to pre-pandemic levels.
• Housing and utilities inflation+0.62% MoMPartly driven by a rebound in rents, which rose from 0.26% to 0.53%.
• Supercore inflationFell to 12bps in April; 3-month and 6-month annualized rates were 3.0% and 3.7%, respectivelyAlthough down from the above-4% peak in January, it remains at an elevated level.
• NY Fed multivariate core trend measure4.0%Rose 53bps in April.

Impact & implications

If underlying inflation continues to move sideways or reaccelerates, the Fed's room to cut rates will become even more constrained, and markets will need to reprice a higher-for-longer policy rate path, with renewed hikes not ruled out. For fixed-income assets, upside inflation surprises would raise discount rates and depress the value of fixed-rate cash flows, leaving long-duration assets with greater rate sensitivity.

Risks

• Underlying U.S. inflation remains above the 2% target, and the disinflation process has stalled.
• Energy shocks and rising inflation expectations may further push up model-based trend inflation.
• Resilient goods inflation, especially in durable goods prices, may prolong inflation pressure.
• Rent data may be distorted by post-government-shutdown data collection disruptions, causing short-term volatility in readings.
• If inflation proves more persistent, the Fed may be forced to shift from staying on hold to renewed rate hikes.
• Long-duration fixed-income assets face price losses from rising rates and higher discount rates.

What to watch

• Whether subsequent core PCE YoY and MoM changes continue to rise.
• Whether the monthly average and median in the underlying inflation dashboard decline.
• The divergence among trimmed mean PCE, median PCE, and the NY Fed multivariate core trend measure.
• Whether University of Michigan inflation expectations continue to be affected by energy price shocks.
• Whether the 3-month and 6-month annualized pace of supercore inflation can fall closer to 2%.
• Fed officials' comments on trend inflation indicators and the risk of rate hikes.