The week brought a tentative ceasefire between the US/Israel and Iran and data confirming that the economic damage was already in motion before any diplomat sat down. From record-low consumer sentiment to the hottest Consumer Price Index (CPI) print in four years, the numbers tell a story of an economy absorbing a geopolitical shock with diminishing buffers and rising uncertainty.

Executive Summary

• The University of Michigan’s consumer sentiment index plunged to 47.6, the lowest reading in the survey’s nearly 75-year history. Year-ahead inflation expectations surged to 4.8% from 3.8%, the largest single-month jump since April 2025.
• Headline CPI rose 0.9% month-over-month in March, the largest gain since June 2022, driven by gasoline prices that surged more than 20%. Core CPI rose just 0.2%, below the 0.3% consensus, with broad disinflationary trends intact.
• Consumer spending rose only 0.1% in real terms in February; Oxford Economics Q1 tracking estimate is just 0.7% annualized. Tax refunds up 14% year-over-year are providing a temporary buffer.
• Equipment spending was tracking 9.7% annualized growth in Q1 prior to the war, but the geopolitical risk index has jumped three standard deviations, threatening to drag equipment investment by roughly 2%.
• Institute for Supply Management (ISM) nonmanufacturing new orders rose to 60.6, the strongest reading in nearly four years, but the prices index surged 7.7 points to 70.7, the fastest pace since 2022.
• The fiscal year 2026 deficit forecast has been revised to $2.3 trillion, with International Emergency Economic Powers Act (IEEPA) tariff refunds exceeding $160 billion due by midyear.
• The ceasefire does not warrant changes to the baseline forecast; oil is expected to average above $100 in Q2.

Sentiment Hits Rock Bottom — And the Floor May Not Hold
The University of Michigan’s consumer sentiment index fell to 47.6 from 53.3 in the April preliminary release, the lowest reading in the survey’s nearly 75-year history. The decline was pervasive, with all demographic groups and all five index components posting setbacks as consumers expressed major concerns over high gas prices and weaker asset values. Notably, the ceasefire was announced just after the survey period for the preliminary results closed; if it holds and translates into lower pump prices and an equity market recovery, the final April reading could see an upward revision. Year-ahead inflation expectations shot up to 4.8% from 3.8%, the largest one-month increase since April 2025, driven by gasoline prices that have skyrocketed since the onset of the war. Long-run expectations rose more modestly to 3.4% from 3.2%, consistent with analysis that long-run expectations track core rather than headline inflation.

• Key Takeaway: If long-run inflation expectations remain anchored, the Fed retains room to focus on downside labor market risks, but the ceasefire’s durability will determine whether that anchor holds.

CPI — Hot on the Outside, Cool at the Core
The headline CPI surged 0.9% in March, the largest monthly gain since June 2022, as the US/Israel-Iran war left its fingerprints on the data. Retail gasoline averaged $3.70 per gallon, up from $2.93 the prior month, with the CPI for gasoline surging more than 20%. Yet beneath the headline noise, core CPI rose just 0.2%, a tenth below consensus, and the broad disinflationary trends across major core categories remained intact.

The ISM nonmanufacturing prices index reinforced the inflationary pressure on the services side, surging 7.7 points to 70.7, the fastest pace of expansion since 2022, as Middle East transportation disruptions bled into domestic supply chains with the supplier deliveries index rising to 56.2.

April will be uglier still. Pump prices are expected to average above $4 per gallon, contributing at least 0.2 percentage points to the headline, while a statistical quirk from last year’s government shutdown will add roughly 0.1 percentage point via the shelter category. Oxford Economics’ provisional Personal Consumption Expenditures (PCE) nowcast shows headline rising 0.5% and core just 0.1%, a gap reflecting gasoline’s much lower weight in the Fed’s preferred measure and a reminder that this is not 2022. Supply chains are not yet flashing red, the labor market is not overheating and One Big Beautiful Bill Act (OBBBA) stimulus is skewed toward lower marginal propensity to consume households.

• Key Takeaway: Two consecutive hot headline prints will test patience, but the core message that underlying disinflationary trends remain intact should give the Fed room to act on employment rather than react to oil.

The Consumer — Weakening Before the War Even Hit
The February income and spending data revealed a consumer already losing momentum before the first missile was fired. Personal income contracted 0.1% in nominal terms, largely on one-off hits to dividends and transfer payments. Spending rose 0.5% nominally but just 0.1% in real terms, a tepid rebound from January’s weather-driven stall. Oxford Economics’ nowcast puts Q1 consumer spending at just 0.7% annualized, with a similarly weak gain forecast for Q2 as the drag from the energy shock builds.

If the war were to re-escalate and equity markets came under additional pressure, spending could decline outright in Q2. A partial offset comes from an unusually strong tax refund season. Cumulative refund issuance is up 14% year-over-year, with aggregate refunds expected to finish 19% higher than last year and the average refund reaching $3,813, up 21%.

Consumer credit rose $9.5 billion in February, but revolving credit growth slowed to just 1.8% year-over-year as higher energy prices and weaker spending weigh on demand for credit.

• Key Takeaway: The consumer entered this shock with less momentum than the headline labor market would suggest, and the energy tax on real incomes has not fully hit yet.

Equipment Spending — Pre-War Strength, Post-War Questions
Headline durable goods orders fell 1.4% in February, dragged by volatile transportation components. But core orders, nondefense capital goods excluding aircraft, rose 0.6%, resuming the strong growth pattern from the second half of 2025. Equipment spending was tracking 9.7% annualized growth in Q1, with shipments up 1.3% in February and capital goods imports buoying estimates of at least a 0.5 percentage point contribution to Q1 GDP growth.

The geopolitical risk index has jumped three standard deviations since the outbreak of the war, which historically translates to a roughly 2% drag on the level of real equipment spending at peak impact. Two structural tailwinds will cushion the blow: the AI buildout continues to drive demand for computers and electronics, and investment incentives under the OBBBA support durable goods spending across categories.

• Key Takeaway: Business investment entered the geopolitical storm with genuine momentum. The question is whether ceasefire uncertainty freezes the capex pipeline before those structural tailwinds can sustain it.

The Fiscal Reckoning — And the Ceasefire Caveat
The cumulative budget deficit for the first half of FY2026 stands at $1.17 trillion, and the second half will deteriorate markedly as OBBBA tax cuts fully kick in, tariff revenue base effects fade and IEEPA tariff refunds exceeding $160 billion begin flowing to importers by midyear.

FY2026 deficit forecasts are upward. Defense spending is up 3.2% year-over-year on a fiscal year-to-date basis, with interest on the debt up 6%. House Republicans are weighing supplemental defense funding tied to the war that could push the deficit wider still.

The ceasefire, for its part, does not warrant changes to the baseline forecast: the Strait of Hormuz is expected to remain near zero throughput until May, and oil is forecast to be above $100 in Q2.

On the labor front, initial claims rose to 219,000 last week but the four-week moving average held at 209,500, down 6.3% year-over-year; continued claims fell to 1.794 million, the lowest since May 2024.[1] The labor market remains stable, but the war has increased downside risks, and it is too soon to assume the ceasefire will hold.

• Key Takeaway: The fiscal trajectory was already unsustainable before the war. A prolonged conflict and supplemental defense spending would accelerate the reckoning.

Final Thoughts
The ceasefire is a geopolitical comma, not a period. Markets have priced out the extreme left tail, but the economic damage (record-low confidence, hot headline inflation, weakening consumer spending) is already in the data and will persist regardless of what happens at the negotiating table. The Federal Open Market Committee (FOMC) minutes confirmed what the data have been indicating: upside risks to inflation are colliding with downside risks to employment, and the Fed is likely to prioritize the latter with two rate cuts this year.

The path forward depends less on the ceasefire’s durability than on whether the damage already inflicted — to confidence, to real incomes, to business investment plans — proves self-reinforcing. The labor market has been the last domino standing, and claims data suggest it remains upright for now. But the energy shock operates with a lag, and the consumer entered this episode with less cushion than the headline numbers suggested. If the war re-escalates, the question shifts from how slow growth will be to whether it turns negative. The old playbook of mean-reverting geopolitical risk is obsolete. This is a world where every shock leaves a scar.

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