Higher energy prices to lift headline inflation

Our central theme that the Fed will be forced to raise rates much more aggressively than markets expect continues to unfold. The two deflationary shocks of 2015 – the surge in the dollar and the slump in commodity prices – are fading rapidly. Consumer prices rose at their fastest pace in nearly two years in April, thanks to a sizeable increase in energy prices. More generally, the rebound in commodity prices we’ve seen over the past few months means that headline inflation will now reach 2% in the second half of this year, before climbing to 3% in early 2017.