Producer prices hit 6%. Consumer prices hit 3.8%. And the economy, like a marathon runner who has not yet noticed the blister forming at mile 18, kept right on going. This week’s data painted a picture of an inflation pipeline running at full pressure and an economy too resilient for its own good, at least from the Federal Reserve’s perspective.

Executive Summary

• Headline Consumer Price Index (CPI) inflation climbed to a multiyear high of 3.8% year-over-year in April, while core CPI held at a stubborn 2.8%. The Producer Price Index (PPI) surged to 6.0% year-over-year, its highest since December 2022.
• Electronic components prices rose 27% year-over-year on artificial intelligence (AI) driven demand for memory chips. Import prices jumped 1.9% month-over-month to 4.2% year-over-year, the strongest since October 2022.
• Our Personal Consumption Expenditures (PCE) inflation nowcast points to headline inflation of 3.8% year-over-year and core of 3.3%, the hottest reading since May 2023.
• Retail sales rose 0.5% in April, and real consumer spending is tracking close to 2% annualized in the first half of the year. Tax refunds offset the gasoline burden two-to-one through April, though that support is now fading.
• Industrial production surged past expectations, inventories jumped in March to reinforce a positive contribution to First Quarter Gross Domestic Product (GDP), and the National Federation of Independent Business (NFIB) reported that hiring intentions and unfilled positions both rose in April.
• Existing home sales edged up 0.2% to 4.02 million, but housing no longer drives the business cycle the way it once did; equities now matter more for household wealth than real estate. Kevin Warsh took the reins at the Federal Reserve with ambitions to lower rates and shrink the balance sheet, but inflation leaves little room to act.

The Inflation Pipeline: Full, and Getting Fuller

Headline CPI inflation climbed to 3.8% year-over-year in April, a multiyear high, while core CPI edged up to 2.8%. The April core reading carried more noise than signal: a statistical quirk from last fall’s government shutdown artificially boosted the shelter component (a one-time correction with no bearing on the trajectory of housing inflation), and used vehicle prices flattened after months of declines partly because outsized tax refunds from the One Big Beautiful Bill Act (OBBBA) generated a temporary burst of demand for used cars. Like a sugar high, that boost will not last. Apparel prices kept climbing on tariff passthrough, while airlines passed along higher jet fuel costs through rising airfares (think of it as an oil surcharge that is slowly spreading from the pump to the boarding gate, to the grocery aisle).

Further up the supply chain, the picture looks worse. The PPI surged 1.4% month-over-month to 6.0% year-over-year, its highest since December 2022, with core producer prices jumping 1.0% as diesel costs (up 60% since the war began) drove transportation and warehousing services up 5% in a single month. The AI buildout continues to turbocharge electronics inflation; producer prices for electronic components rose 27% year-over-year on a global shortage of Dynamic Random-Access Memory (DRAM) semiconductor chips that shows no sign of abating. Import prices added to the chorus, rising 1.9% month-over-month to 4.2% year-over-year, the strongest since October 2022.

Taking all the incoming price data together, Oxford Economics’ PCE nowcast points to headline inflation of 3.8% year-over-year and core of 3.3%, the hottest since May 2023.

• Key Takeaway: The inflation pipeline is full and still pressurizing. Energy passthrough, AI chip shortages and tariff residue will keep core inflation near 3% this year, but this is cost-push pressure in an economy that does not have the overheated labor market or pandemic-era fiscal impulse that turned 2022 into a sustained inflation event.

The Consumer Refuses to Buckle

Retail sales rose 0.5% in April, matching expectations, with Oxford Economics’ nowcast showing consumer prices rising by a similar amount, which means volumes held roughly flat after March’s solid gain. Beneath the headlines, online sales and spending at bars and restaurants continued to post healthy gains, while furniture remained the conspicuous laggard, weighed down by a housing market that refuses to thaw.

The consumer’s staying power through this oil shock has a specific explanation: income tax refunds from the OBBBA offset the gasoline burden by a ratio of approximately two to one through March and April. That ratio is about to flip. With refund season in the rearview mirror and gas prices still creeping higher, it is likely that spending on other goods and services will slow in the months ahead. For now, the numbers remain encouraging. Upward revisions to earlier months lifted first quarter consumer spending to a 1.8% annualized pace, and the second quarter nowcast tracks close to 2%, above a baseline forecast of 1.6%.

• Key Takeaway: The consumer entered the oil shock with a government-issued shock absorber in the form of tax refunds. Now that the absorber is spent, the real test begins. If spending holds up through the summer without fiscal support, it will say something important about the economy’s resilience; if it does not, a December rate cut will arrive right on time.

Factories, Firms and the AI Freight Train

Industrial production surged past expectations in April, with manufacturing driving the rebound and the prior month’s decline revised to be shallower than initially reported. Motor vehicles and parts posted a substantial gain, lifted by a stock market rally that has boosted consumer wealth and appetite for big-ticket purchases, while computers and electronics production continue in the fast lane as the AI buildout pulls defense, space and electrical equipment output along for the ride.

Not everything looked rosy: chemicals, plastics and rubber output weakened, an early signal that petroleum-based manufacturing is beginning to feel the war’s gravitational pull. Small businesses echoed the improving tone, with the NFIB optimism index rising marginally in April, hiring intentions inching higher, and unfilled positions reaching their highest level since May 2025. Planned price increases ticked moderately upward, though businesses are still absorbing much of the energy cost increase rather than passing it along to customers already exhausted by years of inflation. Business inventories jumped in March, reinforcing the positive contribution of stock building to first quarter GDP, and with inventory-to-sales ratios declining and manufacturers reporting that customer stockpiles are too low, restocking could become a meaningful tailwind for the remainder of the year.

• Key Takeaway: The AI freight train is hauling the factory sector forward, but it is also the primary source of the goods inflation that keeps the Federal Reserve pinned to the sidelines. That tension will define the second half of the year.

Housing: Down, but No Longer the Business Cycle

Existing home sales edged up just 0.2% in April to a seasonally adjusted annual rate (SAAR) of 4.02 million, below some estimates. Sales are likely to hover near the 4 million mark until late this year if the Federal Reserve holds off rates cuts until December. The supply of homes for sale rose 5.8% to 1.47 million, but for April, when the spring selling season normally kicks into high gear, that increase fell well short of the 10-year average of 9%; higher mortgage rates and war-related uncertainty continue to keep both buyers and sellers on the sidelines. Median prices rose 0.9% year-over-year, with the familiar regional pattern intact: the Northeast and Midwest posting gains while the South held flat and the West remained slightly negative.

The more important observation, however, is that housing no longer plays the role in the business cycle that it once did. Equities now account for a larger share of household wealth than real estate, and the wealth effects from financial assets are also larger in magnitude, which means AI-driven stock market gains matter more for consumer spending than a frozen housing market. With the homeowner vacancy rate near historic lows, structural undersupply places a floor under prices even as mortgage rates discourage activity.

• Key Takeaway: Think of housing as the economy’s appendix: still there, occasionally painful, but no longer essential to the body’s survival. The AI-and-equities engine has taken over as the primary vehicle for household wealth, and that changes the playbook for reading this cycle.

The New Fed, the Old Problem

Kevin Warsh took the reins at the Federal Reserve this week, confirmed by the Senate with two self-imposed mandates: lower interest rates and shrink the central bank’s balance sheet. Inflation running well above the 2% target and labor market conditions that are stabilizing, if not improving, leave little support for rate cuts in the near term. Shrinking the balance sheet will prove equally stubborn, as further runoff risks pushing up Treasury and mortgage rates, straining repo markets and increasing funding volatility; assuming Warsh can build consensus among Federal Open Market Committee (FOMC) members, the process would likely take years.

On the trade front, President Trump’s summit with President Xi steadied bilateral relations and reduced the tail risk of further tariff escalation, with Boeing orders, agricultural purchase commitments and NVIDIA chip clearances among the announced deals, though Phase One-style pledges from China have a checkered track record.

The federal budget posted a surplus of $215 billion in April, smaller than the $258 billion a year earlier as OBBBA tax cuts reduced individual income tax receipts by 4.1% and corporate receipts by 11.8%. Oxford Economics estimates the fiscal year 2026 deficit will total $2.085 trillion, or 6.5% of GDP, with risks tilted toward a larger shortfall as war costs mount and tariff refunds accelerate.

• Key Takeaway: Warsh inherits a Federal Reserve that wants to cut but cannot, a balance sheet that should shrink but will not, and an economy that inflation hawks and growth doves can both point to as vindication. December will likely be the first real test of how the new chairman steers a deeply divided committee when the incoming data refuse to send a clear signal.

CIO View

If the economy were a patient, the diagnosis this week would read: vital signs strong, temperature elevated, prognosis favorable but requiring monitoring. Producer prices at 6%, consumer prices at 3.8%, and a labor market that is quietly tightening do not describe an economy in need of emergency intervention. They describe one that can afford to let inflation burn off naturally as the energy shock fades, even if the process is slower than anyone would like. It is more likely now that we will get a rate cut in December, later than consensus but more dovish than market pricing. The May baseline confirms GDP growth of 2.2% for the year, with consumer spending at 1.9% and the inventory restocking cycle providing an upside surprise.

The deeper tension in the data sits between the inflation that AI is creating and the productivity it will eventually deliver. Electronics prices are up 27% year-over-year. Memory chip shortages show no sign of resolving. And yet productivity is running near 3%, business formation is historically strong, and the capital deepening from the AI buildout will, in time, generate the efficiency gains that bring inflation back toward target. The question is whether “in time” means one year or five.

For the consumer, the next few months represent the hardest stretch of the cycle: the tax refund cushion is spent, gasoline prices are still climbing, and sentiment sits at a 75-year floor. If spending holds up through the summer without fiscal support, it will tell us the labor market is strong enough to carry the load alone. If it does not, a December rate cut could arrive right on time. Either way, the economy’s growth potential remains intact, and the Warsh Fed will inherit a foundation that bends but does not break.

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