Traders believe inflation could near 5% this year

Prices in April rose at their fastest pace since May 2023. Traders on prediction market platforms think the peak in inflation isn’t here yet.

While the headline annual inflation rate rose 3.8% last month, traders on Kalshi think it is near certain that price increases will rise above 4% in 2026, and give almost two-in-three odds that it goes above 4.5%.

Traders also see an almost 40% chance that inflation will cross 5% this year. That hasn’t happened since February 2023. 

That’s significantly higher than Wall Street projections. Economists polled by FactSet forecast that inflation will peak at an average of 3.8% in the current quarter and fall to 2.8% by the end of the year.

Households, though, are more in line with the prediction market forecast. A University of Michigan survey released Friday found that consumers expect inflation of 4.5% over the next year. On Polymarket, traders believe there is a 50% chance that U.S. inflation rises above 4.5% in 2026. 

Headline inflation jumped last month as energy prices soared due to the Iran war and the closure of the Strait of Hormuz. But core inflation, which measures the change in prices excluding food and energy, also rose 0.4% in April and 2.8% year over year.

Food, materials, shelter, lodging

“The first order effect from the conflict in the Middle East [has] been a shock to oil prices, which [has] translated very quickly to what consumers are paying at the pump, but the next frontier to watch is rising input prices for food and materials,” said Skyler Weinand, chief investment officer at Regan Capital.

While the U.S.-Iran conflict drove energy prices higher, not all of the inflation story can be explained easily by the war. Notably, shelter prices rose 0.6% in April.

Traveling got more expensive, too. Airfares jumped 2.8% in the month — as airlines passed through to consumers rising jet fuel prices — and lodging away from home rose 2.4%. Apparel was up 0.6%, although that is a smaller increase than in March. 

But the energy shock is what’s driving headline inflation. So long as the strait, a passageway for 20% of the world’s crude oil before the war, remains closed, consumers are unlikely to see immediate relief. U.S. oil prices again crossed $100 a barrel on Tuesday. 

A majority of Kalshi traders don’t think maritime traffic through the strait will return to normal until October.

The longer the strait is closed, the greater the risk to prices. Perhaps as a consequence, Kalshi traders now give a more than 50% chance that the Federal Reserve will raise interest rates by July 2027. 

“In the first quarter of disruption, the oil supply shock is largely about higher prices,” wrote Seth Carpenter, chief global economist at Morgan Stanley, in a note on Monday. “A second quarter of disruption with continued price escalation would start to diminish the ‘transitory’ nature of the shock … and central banks would have to pivot from delays to policy stance changes.”

— CNBC’s Liz Napolitano contributed reporting

Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.

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