US inflation is back above 4%. Here’s what it means for your portfolio.

• US headline PCE inflation rose to 4.1% year-on-year in May 2026, the highest since April 2023, driven by surging energy prices following the US-Iran conflict. Core PCE, which strips out food and energy, climbed to 3.4% — its highest since October 2023 — and remains well above the Fed's 2% target.

• We expect inflation to remain elevated as gasoline prices are likely to stay high despite lower oil prices, higher energy costs continue to feed through to broader inflation, and additional upside risks from tariffs and rising memory chip prices keep price pressures elevated.

• We do not expect the Federal Reserve to cut interest rates this year, and continue to see a meaningful possibility of further rate hikes should inflation remain persistent and the labour market stay resilient.

• We remain underweight US consumer discretionary and broader US equities, while favouring high-quality digital economy companies with strong balance sheets and durable earnings. We also prefer Asian markets, where comparable earnings growth is available at more attractive valuations.

Inflation reaches a two-year high

US inflation, as measured by the Personal Consumption Expenditures (PCE) Price Index, rose 4.1% year-on-year in May 2026 from 3.8% in April. While the reading was in line with market expectations, it marked the highest inflation rate since April 2023, largely reflecting the surge in energy prices following the US-Iran conflict.

The core PCE Price Index, which excludes volatile food and energy components, increased 3.4% year-on-year, up from 3.3% in April. The reading, also in line with consensus estimates, was the highest since October 2023 and remained well above the Federal Reserve's 2% inflation target.

Goods inflation accelerated to 4.8% year-on-year from 4.4% in April, led by gasoline and other motor fuel (41.8% vs. 29.3%), jewellery (22.0% vs. 5.8%), and clothing and footwear (4.3% vs. 3.8%).

Services inflation also picked up, rising to 3.8% from 3.5% previously. The increase was driven by transportation services (6.6% vs. 5.8%), as higher jet fuel costs lifted airfares, financial services (9.5% vs. 7.4%) amid stronger equity markets that boosted fee income, and healthcare services (3.2% vs. 2.9%).

Figure 1: US inflation surged on the back on high oil prices

Inflation will likely stay higher for longer despite falling oil prices

We expect inflation to remain elevated over the coming months for several reasons.

Firstly, while Brent crude has fallen to around USD72.4 per barrel from a peak above USD110 during the conflict, we believe markets may be overly optimistic about the speed of supply normalisation. Investors have largely priced in the resumption of shipping through the Strait of Hormuz, but operational risks remain elevated. Shipping traffic is currently restricted to two designated routes along the coasts of Oman and Iran, while concerns over uncleared underwater mines and the risk of vessels being caught in renewed hostilities continue to disrupt maritime activity. These risks were highlighted over the weekend when the US and Iran exchanged fresh strikes after a Singapore-flagged container ship was hit.

Secondly, even if crude oil prices continue to ease, gasoline prices are likely to remain elevated for some time. Although Brent crude has largely retraced to pre-conflict levels, the national average gasoline price remains around USD3.87 per gallon, roughly one dollar above pre-war levels, according to the American Automobile Association.

This is because retail gasoline prices typically lag movements in crude oil. In addition to crude prices, pump prices are influenced by factors such as refining and distribution costs, as well as inventory levels. As a result, lower crude prices typically take weeks—or even months—to be fully reflected at the pump as supply chains gradually normalise.

A similar pattern was observed during the 2008 oil price collapse. According to the Congressional Research Service, crude oil prices fell 22% between July and September, while gasoline prices declined by only around 9% over the same period.

As a result, households are likely to face elevated fuel costs for several more months, reducing disposable income available for discretionary spending such as retail purchases and dining out. The impact is likely to be most pronounced among lower- and middle-income households, which remain under financial pressure and continue to exhibit cautious spending behaviour.

Thirdly, beyond energy, several other inflationary forces are emerging. These include second-round inflation effects as higher energy costs feed into broader input prices, the possibility of additional tariffs under the Trump administration, and rising memory chip prices amid persistent supply shortages. Apple, for example, raised prices for its Mac computers and iPads by 15% to 25% earlier this week, citing significantly higher memory and storage chip costs.

Taken together, we believe inflation is likely to remain above the Federal Reserve's 2% target for longer. With the labour market remaining resilient—evidenced by three consecutive months of solid nonfarm payroll growth and healthy initial jobless claims—we do not expect the Fed to cut interest rates this year and continue to see a meaningful possibility of  rate hikes should inflation remain persistent.

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Positioning for persistent inflation and higher rates

Against this backdrop, we remain cautious on US consumer discretionary equities as several headwinds to household spending continue to build. The temporary boost from personal tax refunds is fading, while the personal saving rate has fallen to a three-year low of 3%, indicating that households are spending a larger share of their income and leaving themselves with less financial cushion. With the possibility of rate hikes firmly on the table, borrowing costs for mortgages and other big-ticket purchases are likely to remain elevated, further weighing on consumer spending.

Conversely, we remain constructive on the digital economy, where companies continue to benefit from the structural tailwinds of AI adoption and ongoing investment in AI infrastructure, supporting sustained earnings growth. However, we would avoid high-growth, loss-making technology companies, which tend to be more vulnerable to rising interest rates through both higher financing costs and lower valuation multiples. Instead, we favour high-quality technology companies with strong balance sheets, resilient earnings and durable competitive advantages.

Beyond technology, we continue to favour quality companies with strong balance sheets, consistent earnings and high returns on equity, as these businesses are generally better positioned to navigate a more challenging macroeconomic environment.

At the broader market level, we remain underweight US equities. While earnings growth prospects remain very strong, we believe several Asian markets such as South Korea and Taiwan offer comparable earnings growth at significantly more attractive valuations, presenting a more favourable risk-reward profile.

Table 1: Recommended products

Sector/Style	Recommended Products
Digital Economy	•       Fidelity Global Technology A-ACC-USD •       Eastspring Investments Unit Trusts – Global Technology SGD •       Invesco NASDAQ Internet ETF (NASDAQ: PNQI)
Quality	•       JPMorgan U.S. Quality Factor ETF (NYSE: JQUA)

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.