President Donald Trump has repeatedly dismissed the war with Iran and the consequent spike in oil prices as a “little excursion,” suggesting that once the conflict settles, energy costs will quickly reverse.

But the economy is leaving little room for that kind of optimism.

The Federal Reserve’s preferred inflation gauge is running hotter than its last official print suggests — and one of Wall Street’s more careful inflation trackers thinks it may have already cleared 3.25%, weeks before the data confirms it.

“It’s not plausible to call this stable or even sticky,” Gerard MacDonell, economist at 22V Research, said in a note to clients on Wednesday.

Fed’s Preferred Inflation Gauge Running Over 1% Above Target

MacDonell published a simulation Tuesday showing Core Personal Consumption Expenditure (PCE) inflation reaching 3.27% on a 12-month basis in March — 125 basis points above the Fed’s 2% target, and 54 basis points above where it stood just one year ago. 

Core PCE — not the better-known Consumer Price Index — is the measure the Federal Reserve uses to calibrate interest rate decisions. It draws on a broader basket of goods and services and weights housing differently than the Consumer Price Index, which is why the two readings can diverge significantly at key turning points in the inflation cycle.

Core PCE strips out food and energy prices by design. That exclusion matters now: oil has surged since the Iran conflict began, and that shock will hit the headline reading far harder.

“We know that higher energy prices will generate some passthrough into the Core PCE, although the headline is slated to rise much more,” MacDonell said.

That makes the underlying signal all the more striking. Even with energy removed from the equation, inflation is accelerating.

Import prices for February surged well above expectations, adding an external cost-push dimension that may sustain pressure into April and May regardless of where tariff rates land.

MacDonell notes that foreign suppliers may have used the stabilization of tariff rates as cover to push through price increases they had been holding back — a dynamic not widely priced in by consensus.

How High Will Inflation Get In 2026? What Prediction Markets Are Pricing In

Traders on Polymarket have moved aggressively into the upper brackets for March annual inflation.

As of Wednesday, the market assigned a 36% probability that the CPI inflation would land at 3.4% or above — the highest-volume bracket on the board, with more than $202,000 in open interest.

Another 34% bet on a 3.3% print.

The broader annual inflation markets tell a similarly pointed story. Polymarket currently assigns a 97.7% probability to annual inflation staying above 3% in 2026; 44% to it exceeding 4%; and 24% to it clearing 5%.

Those odds reflect growing market concern that the Iran conflict is not a temporary energy shock but the catalyst for a broader, stickier price resurgence.

The Fed’s Uncomfortable Position

If MacDonell’s March estimate is directionally correct, the Fed enters its April meeting with Core PCE running more than 125 basis points above target and accelerating.

The trap is structural.

The Fed can’t cut into a 3.3% Core PCE without torching its credibility. It can’t hike into an economy absorbing a geopolitical oil shock without risking a hard landing.

It can’t hold indefinitely if inflation keeps printing above 3% month after month. There is no clean exit from this triangle — and the longer the Iran conflict persists, the smaller each corner gets.

For rate-sensitive sectors — like the Real Estate Select Sector SPDR Fund (NYSE:XLRE) or SPDR S&P Regional Banking ETF (NYSE:KRE) — a Core PCE confirmation above 3% is clearly a negative catalyst.

For commodities and energy-linked assets, it reinforces the thesis that the Iran shock has a longer tail than Trump’s “little excursion” framing implies.

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