TD Securities economists forecast May US CPI data to show cooling momentum in core prices while remaining elevated. They see core CPI rising 0.23% month on month and 2.8% year on year, while headline CPI is expected to climb to 4.2% year on year after a further 0.4 percentage-point increase. The call is framed around shelter “normalisation” following a temporary boost in the prior report, alongside energy-related pressures feeding into core services through firmer airfares.

Within the details, they project goods prices to rise 0.13% month on month in May, in line with the three-month average, with core goods ex-vehicles accounting for most of the gain as household goods, apparel and other categories increase. Another decline in used vehicle prices is expected to offset part of that rise. Looking ahead, they expect the oil-price shock and lingering tariff passthrough to push the core segment towards 3.0% year on year in June, with upside risk if jet fuel costs are passed through to airfares more than assumed, and they see limited year-on-year improvement in 2026.

—

Persistent Inflation and Federal Reserve Policy Outlook

Given today’s date of June 8, 2026, we anticipate the upcoming May US CPI report will confirm that inflation is moderating but remaining stubbornly high. We expect core inflation to print at 2.8% year-over-year, while the headline number is forecast to reach a three-year high of 4.2%. This persistent inflation challenges the market’s hope for imminent interest rate cuts from the Federal Reserve.

This outlook suggests the Federal Reserve will maintain a restrictive policy stance for longer than many anticipate. Current pricing in the Fed Funds futures market, as of early June 2026, implies a nearly 45% probability of a rate cut by September, a view we believe is overly optimistic. We see value in derivatives that position for rates staying higher for longer.

—

Positioning for Market and Inflation Risks

Consequently, we are looking at options on SOFR futures that would profit if the market reprices to reflect fewer rate cuts this year. Selling call options on futures contracts for the third and fourth quarters could be an effective strategy to capitalize on this view. The risks of an upside inflation surprise, driven by oil prices and airfares, make this positioning attractive.

With the potential for a surprise in the upcoming CPI data, we also see an opportunity in volatility markets. Historically, CPI releases that deviate significantly from consensus have caused the VIX to spike; for instance, unexpected prints in late 2025 led to average daily VIX increases of over 10%. We believe buying short-dated VIX call options provides a cost-effective hedge against a market shock.

The mention of an ongoing Iran conflict adds a significant upside risk to energy prices, which could flow through to broader inflation. The global benchmark, Brent crude, has already climbed over 8% in the past month to approximately $92 per barrel. We believe traders should consider call options on crude oil to position for a potential geopolitical flare-up that could push inflation even higher.

Looking toward the second half of 2026, we do not foresee meaningful progress in bringing core inflation down. Core goods prices, excluding vehicles, continue to show strength, and shelter costs are normalizing at elevated levels. This reinforces our view that derivative strategies should be structured around a theme of persistent inflation and a cautious Federal Reserve through year-end.