Will U.S. Inflation Rise Further? Prediction Markets Bet on 5%

Kalshi Traders See 4% Inflation Rate as a Near Certainty This Year

With the Consumer Price Index (CPI) rising 3.8% year-on-year in April, prediction market traders are raising the possibility that inflation could reach 5% this year.

According to CNBC on May 12 (local time), traders on the prediction market platform Kalshi are almost certain that inflation in 2026 will exceed 4%, and they estimate a two-thirds chance that it will surpass 4.5%. They assess that there is nearly a 40% probability that inflation will exceed 5% this year.

Traders on another prediction market platform, Polymarket, believe there is a 50% chance that U.S. inflation will exceed 4.5% this year. Prediction markets are platforms where participants wager money on the outcomes of events such as elections and sporting matches, and receive payouts according to the odds if their prediction is correct.

This is much higher than Wall Street forecasts. According to a FactSet survey of economists, they expect inflation to peak at an average of 3.8% this quarter before falling to 2.8% by the end of the year.

Consumers appear to have views closer to those of the prediction markets than to those of economists. According to the University of Michigan Consumer Sentiment Index released on May 8, consumers expect inflation to reach 4.5% over the next year.

On this day, according to the U.S. Department of Labor, the April CPI rose 3.8% year-on-year and 0.6% month-on-month. This was due to the sharp rise in international oil prices after the Strait of Hormuz was blockaded as a result of the Iran war.

However, CNBC pointed out that not all causes of inflation can be attributed to the war. The core CPI, which excludes volatile energy and food prices, rose 2.8% year-on-year and 0.4% month-on-month—both higher than forecasts. In April, energy prices rose 3.8% month-on-month, while housing prices increased by 0.6%, airline ticket prices by 2.8%, and lodging costs by 2.4%.

In the market, there are concerns that inflation driven by the Iran war could spread beyond oil prices into other sectors. Skyler Weinand, Chief Investment Officer (CIO) at Rigan Capital, said, "The primary impact of the Middle East conflict was a shock to oil prices, which was very quickly reflected in what consumers pay at the pump," adding, "But the next area to watch is rising food and input commodity costs."

The majority of Kalshi traders do not expect maritime transport through the Strait of Hormuz to return to normal before October. The longer the blockade continues, the greater the risk to prices. Reflecting this, Kalshi traders see more than a 50% chance that the U.S. Federal Reserve will raise interest rates by July 2027.

Seth Carpenter, Chief Global Economist at Morgan Stanley, said, "In the first quarter after an oil supply shock, the main issue is limited to rising prices," but added, "If the surge in oil prices continues into the second quarter and the disruption persists, the 'temporary' nature of the shock will begin to weaken, and central banks will have to move beyond merely delaying policy responses to actually shifting their policy stance."