Wall Street Is Getting More Anxious About Long-Term Inflation Surging energy prices have pushed investors’ inflation expectations to multiyear highs

Even before the latest release of the consumer-price index, inflation expectations had been climbing, a potential trouble spot in a market where stocks have largely shrugged off the U.S.-Iran conflict and the resulting energy shock.

Investors bet on inflation by buying and selling both ordinary U.S. Treasurys and those that hedge the risk of inflation, called Treasury inflation-protected securities, or TIPS. The gap between the yields of the two types of bonds—known as the break-even rate—recently hit its highest level since October 2022, according to Federal Reserve data, suggesting that investors expect annual inflation to average around 2.7% over the next five years.

The 10-year break-even rate has also climbed, hitting 2.5% this month, its highest level since 2023.

Driven largely by the war-fueled surge in oil prices, the rise in inflation expectations worries investors because of the challenges it poses for the Fed’s interest-rate policy and major indexes’ latest run to records.

Stocks and other risky assets have generally performed well in recent years, while inflation has remained elevated. But that has also come while expectations for future inflation have stayed muted, providing space for the Fed to cut interest rates. An uptick in those expectations could put pressure on the Fed to raise rates, analysts said, creating a tougher environment for markets. (…)

Fed officials have long discussed the importance of inflation expectations in determining the appropriate level of rates. The major concern is that elevated expectations can be self-fulfilling, with businesses raising prices now if they expect their costs to be higher in the future.

If nominal interest rates stay the same, rising inflation expectations can also encourage businesses and consumers to borrow and spend more, by making the cost of borrowing look less expensive on inflation-adjusted terms. (…)

The WSJ Editorial Board:

(…) Consumer prices rose 0.6% in April, or 3.8% over the last 12 months. That’s down from 0.9% in March, and some 40% of the increase was related to the Iran war’s energy shock. But that’s little consolation since so-called core prices, sans food and energy, rose 0.4% in April, an acceleration from 0.2% in March, and 2.8% for 12 months.

Service prices were notably hot, with shelter up 0.6%, and overall non-energy services up 0.5% or 3.3% over 12 months. The disinflation in goods prices also seems to have stopped, as apparel prices are up 4.2% in the last year, and Whirlpool last week announced it raised prices 10% in April, as two examples.

These figures confirm the inflation pop in the recent personal-consumption-expenditure data.

They also suggest that the disinflation earlier this year may have been another of the false dawns that have typified recent Fed performance. The central bank keeps thinking it has inflation conquered, and it begins a monetary easing cycle, only to find out its optimism was premature. (…)

The real challenge for Mr. Warsh will be navigating the economic reality he inherits of renewed inflation, an oil shock affecting consumer confidence, and a President who always wants lower interest rates but higher tariffs. Cut interest rates too much to accommodate the oil shock and he might accelerate inflation. But raising rates to fight a temporary oil-caused price spike could cause a recession.

Wish Mr. Warsh good luck. He—and we—will need it.

Here we go, again. Let’s all try to get used to “temporary” or “transitory” inflation.

1. Who knows when the war ends and how energy prices behave after? Most observers expect oil prices to eventually stabilize above pre-war levels but disagree by how much.
2. Core CPI jumped 0.4% in April after averaging +2.25% in the previous 4 months.
3. Core goods prices were unchanged in April after +0.1% in each of February and March. They are up 1.1% YoY, after one full year of tariffs!
4. Core services jumped 0.5% in April after averaging +0.3% in the previous 4 months. Rentflation is back!
5. But services less rent inflation rose 0.4% in April, +4.1% annualized since December.
6. Household energy prices shut up 1.8% in April after +1.5% in March and +0.5% in February. They are up 3.4% YoY but 15% annualized in 3 months. Electricity costs jumped 2.1% MoM in April.

Powell’s supercore CPI rose 0.45% MoM in April, +3.4% YoY.

@zerohedge

While economists debate “transitory”, most Americans are trying to cope with inflation on “essentials” (black line) which jumped from +2.7% YoY in February to +3.9% in March and +4.7% in April. Congress people are getting increasingly worried about “transitory” as we approach November with such inflation numbers.

(Bloomberg)

• Prices at the Pump Are Wiping Out Wage Gains Americans’ hourly wages are up. The problem? Inflation is up even more.
• US Shoppers Are at Risk of a Costly Christmas as China Hikes Prices

Chinese suppliers to major US retailers like Walmart Inc. and Costco Wholesale Corp. said they are hiking prices for the first time in years as raw material costs soar just as factories ramp up production for Christmas.

According to interviews with more than a dozen suppliers over the past two weeks, the increases vary depending on the product and type of customer. Chinese manufacturers are raising prices by up to about 5% for some products for big box retailers, according to five of the people, and the increases go up to 15% for smaller merchants, according to 11 of the people. (…)

The timing is sensitive as the global retail sector enters the critical window in which production orders are placed now to be available for Christmas, meaning inflationary pressure that’s already piling stress on household budgets could build as the festive season approaches. Costco and Walmart declined to comment. (…)

US retailers have largely held off on raising prices themselves. Big retailers’ wide range of products means that, should they need to lift prices, they can distribute the change through smaller increases across multiple goods, which may be less disruptive to consumers than a spike in just one item, according to Bloomberg Intelligence senior analyst Jennifer Bartashus. (…)

Some manufacturers said they started to receive orders for production for the Christmas season in mid-April — weeks ahead of the usual timing.

Jason Hu, a sales manager at a knitwear factory in the southeastern Chinese province of Jiangxi, said there’s been so much front-loading that his company has effectively hit its annual sales target and is turning down additional orders due to near-term capacity constraints. He’s raised prices by as much as 10% for orders placed since April to help offset synthetic fiber cost increases of 20% to 30%. (…)

Chen Hao, who operates a bedding manufacturer in Jiangsu province, said he raised prices by 10% to 15% for US and European clients since April. Some major retailers accepted increases of about 5% for new orders, along with faster payment terms.

But “if oil prices fall, clients will immediately push for discounts again,” he said. “After so many years cutting prices, please let me enjoy the rare chance to ask them to pay more for a little longer.”

BTW: The share of credit card loan balances 90+ days delinquent rose to 13.1%, up from 12.7% in Q4 2025 (the highest since Q1 2011).

@C_Barraud

Fed’s Goolsbee Says Services Inflation May Point to Overheating

(…) “If you look at the components that are not energy, like services, if that is an indication that the underlying economy is overheating then the Fed has got to be thinking about how do we break the chain of escalating inflation,” Goolsbee said Tuesday in an interview on NPR.

Goolsbee said the report was worse than expected and that a pick up in services inflation, which isn’t impacted by tariffs or the surge in energy prices, is particularly worrying.

“We’ve got an inflation problem in this country and we’ve got to get it back down,” Goolsbee said.

• CPI Heats Up But, Unlike 2021-22, Wages Remain Cool

During 2021 and 2022, a wage-price spiral was exacerbated by widespread global supply chain disruptions and a spike in oil prices following Russia’s invasion of Ukraine. This time, the war in the Middle East has caused oil prices to spike. Some supply chains have been disrupted. But a wage-price spiral is less likely.

The labor market is in equilibrium this time. In 2021-22, demand for labor significantly exceeded the supply of labor. So, wage inflation should remain much more moderate this time than it was back then.

If so, then a wage-price spiral is unlikely to amplify the inflationary consequences of the supply shock attributable to the Strait of Hormuz blockade.

Unit labor cost inflation fell to 1.2% y/y during Q1 as productivity gains offset increases in hourly compensation. In our Roaring 2020s scenario, productivity should remain a powerful disinflationary force, while wage inflation remains moderate. (…)

The April rent jump was likely a one-shot anomaly. During the 47-day government shutdown, the Bureau of Labor Statistics (BLS) didn’t collect rent data and assumed zero shelter inflation for October. Since the BLS resurveys the same units every six months, the missing data was reconciled in April, producing a one-time catch-up spike. The effect is expected to reverse in the coming months, with market rents indicating continued moderation. (…)

We see three forces driving consumer spending: Retired Baby Boomers drawing down their net worth, young adults receiving financial support from their parents, and an unusually strong tax refund season.

Let’s hope because:

Data: Bureau of Labor Statistics. Chart: Axios Visuals

Today we get the PPI. Friday retail sales.

Oil Inventories Falling at Record Pace on Iran War, IEA Says

Global observed oil inventories declined at a rate of about 4 million barrels a day in March and April, according to a monthly report from the agency, which is co-ordinating the release of emergency fuel stocks by major economies like the US, Japan and Germany. The market will remain “severely undersupplied” until October even if the conflict ends next month, it said. (…)

Global supplies slumped by a further 1.8 million barrels a day last month, taking total losses since February to 12.8 million barrels a day, according to the report. (…)

World oil consumption is set to plunge by 2.45 million barrels a day this quarter, the steepest drop since the 2020 Covid pandemic, as product flows are cut off and prices soar. (…)

“The steepest losses are seen in the petrochemical sector where feedstock availability is becoming increasingly constrained,” according to the report. “Aviation activity is also running well below normal levels.” (…)

The supply shock, which has sharply curtailed exports from Persian Gulf producers like Saudi Arabia, the United Arab Emirates and Iraq, has cumulatively removed more than 1 billion barrels from the market and erased the global glut that had been projected for this year before the conflict began, the IEA said.

In March, the IEA oversaw a pledge by member nations such as the US, Germany and Japan to deploy a record 400 million barrels from their emergency reserves. These are now moving from storage sites into markets, it said.

The deficit is also being partly alleviated by increased flows from the Atlantic Basin — led by producers such as the US, Brazil, Canada and Venezuela — to “hard-hit” markets in Asia, according to the report.

ECB’s Rehn Says Data Show First Sign of Stagflationary Shock

(…) Rehn, like his colleagues, stressed that the key factors are the strength and duration of the war, as well as possible spillovers. But he said there’s no sign yet of inflation expectations de-anchoring and called developments over wages “reassuring.” (…)

“You would need a very fast and positive solution in the Hormuz Strait and the Middle East so energy prices clearly and more persistently begin falling again,” he told Bloomberg in Tallinn. “The level of today’s energy prices probably means slower economic recovery and growth but we haven’t fallen into stagflation.”

Expansion in the euro zone’s 20-nation economy looks set to soften, a factor that could act as a counterweight to inflation. In an indication of such weakness, France reported earlier Wednesday that unemployment unexpectedly rose to the highest level in five years, reaching 8.1%.

Investors are betting the ECB will raise its deposit rate by a quarter-point in June and twice more before year-end, though policymakers remain wary of confirming any move.

“I’m hearing a debate about whether it’s June or afterwards,” Bank of France Governor Francois Villeroy de Galhau, who retires this month, told Franceinter radio. “In April, we decided to keep rates on hold. Why? Because we don’t yet have enough information on this infamous propagation to other prices, to services and goods.”

Now, Domeflation!

Trump’s Golden Dome will cost 5X more than expected

The Congressional Budget Office (CBO) has done some number crunching on President Trump’s plan for the national missile defense system, nicknamed the Golden Dome.

The CBO reported the plan outlined in Trump’s executive order would cost about $1.2 trillion to develop, deploy, and operate for 20 years. These sums are significantly ahead of the numbers initially proposed by the administration, which suggested costs would land around $175 billion.

Moreover, the CBO warned the capabilities of the dome would be limited. It wrote the system would have the capacity to fully engage an attack mounted by a regional adversary with limited capabilities, such as North Korea, or a small-scale attack launched by a near-peer adversary (such as Russia or China).

However, the system could be overwhelmed by a full-scale attack mounted by a peer or near-peer adversary. (Fortune)

AI’s Big Guns Have a Serious Inflation Problem

AI cost inflation is finally going mainstream.

AI infrastructure costs just keep on rising. (…) The artificial-intelligence boom is also crowding out supplies of more conventional chips. (…)

Some of the most cash-generative tech firms and best-funded startups in history are frantically competing to secure enough hardware, fearing that otherwise they’ll be left behind in the race for superintelligence. And while these buyers are relatively price-insensitive, their chip suppliers tend to have dominant market positions with huge technical and financial barriers standing in the way of more competition. Controlling these bottlenecks is proving very lucrative. (…)

Hyperscalers’ latest earnings reports reveal the painful sting of inflation. Microsoft expects higher component prices to add $25 billion to its full-year capital spending bill, which now totals an eyewatering $190 billion. Meta hiked the midpoint of its forecast capex range by $10 billion, attributing it mostly to component costs, particularly memory chips. (…)

SK Hynix’s operating margins reached a record 72% in the latest financial quarter. Customers are “prioritizing securing volume over pricing,” the South Korean company says, unabashed. Samsung’s average selling prices for DRAM increased by more than 90% in the same three-month period compared with the quarter preceding it.

In aggregate, spending on various types of memory could account for 30% of hyperscalers’ capex in 2026, according to research firm SemiAnalysis. It was just 8% in 2024. (…)

[GPU] Rental prices are “increasing across the board,” says CoreWeave Inc., a prominent neocloud. (…)

Amazon expects Trainium to save it tens of billions of dollars yearly on its own spending. Claude and ChatGPT’s owners, Anthropic PBC and OpenAI, have signed multibillion dollar contracts for the chips with Jeff Bezos’s firm, although in the near term most supplies are sold out or reserved.

Among other promising innovations, Google’s TurboQuant compression technique could help curb memory spending, and Arm Holdings Plc expects its new CPU to cut the cost of a gigawatt of datacenter capacity by $10 billion or so. Meantime, the tech elite’s largess is having unwelcome spillover effects. (…)

And beyond the AI frenzy, manufacturers of smartphones, games consoles and PCs are struggling to secure memory chip supplies because their makers are prioritizing the more lucrative datacenter market and long-term contracts with hyperscalers. Consumer-tech product firms must either pass on price increases, lower device specifications or swallow a hit to their margins. Global smartphone sales are projected to decline around 13% this year, with budget handsets particularly affected. Nintendo Co. Ltd. has lifted the price of its Switch 2.

Semiconductor factories take years to build, so there’s no prospect of a swift supply response. It’s a notoriously cyclical industry and several companies suffered heavy losses not so long ago, making them wary of overexpanding.

When you factor in higher electricity prices caused by power-hungry data centers, AI will probably be quite inflationary for a while. (…)

Perhaps as a case in point, CoreWeave stock sunked 18% since May 6, after beating revenue estimates by 5% to +112%, showing a revenue backlog up 49% QoQ and contracted power reaching 3.5GW from 850MW at the end of 2025. Goldman Sachs suspects the “stock reaction is a function of the increase in capex reflecting increases in component pricing”.

From yesterday’s Daily Edge, in case you missed it:

David and I have been strong believers in AI. The February 9, 2026 post Railroaded? and the March 13 deep dive The AI Supercycle: A Deep Dive offered our supporting analysis.

Concluding Railroaded? I wrote:

• AI is truly transformational and will be quickly widely adopted for productivity and competitiveness imperatives.
• Unlike the railroads and the IT infrastructure booms, there is little front-loading “hoping/waiting for demand” investments, nor much leveraging at this time.
• Prices/costs are coming down fast, necessary to boost demand/usage along the way.
• Agentic AI will be huge.
• In the AI era, moat is crucial and bigger is better.
• Diversified revenue/cashflow streams are desirable.
• No or low indebtedness is preferable.

From a macro perspective,

• AI is clearly and significantly boosting GDP growth.
• AI is clearly inflationary in some sectors (construction, commodities, power), disrupting other sectors by hording resources.
• The massive hyperscalers expenditures (almost the size of the US defense budget) are redirecting their excess cash from the fixed income markets into the real economy with high multiplier effects. Will productivity gains offset demand-pull inflation?
• Will these financial flows (reduced corporate demand) impact US interest rates?

Only 4 months later, demand is even stronger than expected thanks to Anthropic’s Claude Code. Compute demand is even too strong, too quickly, forcing Anthropic to tame demand through higher prices and controlled access until more data centers add to compute supply.

The various expected roadblocks have materialized, e.g. power (Power Play Sept 23, 2024), equipment, workers and NIMBY protests, slowing supply growth but extending the buildout cycle.

Costs are rising fast, magnified by the US war on Iran and its effects on various supply chains. An increasing part of AI capex is scarcity-induced inflation, positive for suppliers’ margins dealing with scrambling, price insensitive buyers.

BTW, this is a dangerous situation for inflation. Consider:

• Exploding AI compute is fueling significant demand other than chips and memory for resources such as power (oil, gas, solar, nuclear), labor (construction, plumbers, electricians) and specialized hardware (turbines, transformers, cooling equipment). Time is of the essence so hyperscalers are totally price insensitive, a situation likely to persist through 2030.
• Hormuz is forcing countries and corporations to build reserves and hoard various critical resources and materials as protection from constrained supply chains. Hoarding of oil, gas, helium, fertilizers, chips, etc. is now required in an increasingly selfish, uncooperative environment. This will permanently raise resource costs across the world and reduce/eliminate operating efficiencies built during globalization.
• The Ukraine and Iran wars have significantly depleted ammo and equipment inventories which will need to be hastily rebuilt. At the same time, the world has also learned that alliances can be fickle, incentivizing many countries to find ways and means to protect themselves. Demand for military equipment will be firm and largely price insensitive for several years.

AI and productivity will not help offset the huge, world-wide demand for such a broad spectrum of resources and goods against largely price insensitive buyers.

This was already evident from April’s J.P. Morgan Global Manufacturing PMI:

• Global manufacturing growth accelerates in April despite sharp rises in prices and supply chain delays

The start of the second quarter of 2026 saw rates of expansion in global manufacturing output and new orders strengthen. However, price and supply chain pressures continued to build (…).

Manufacturing production increased for the ninth month running, with the rate of growth hitting a near five-year high. Expansions were signalled across the consumer, intermediate and investment goods sectors.

The increase in production was supported by faster growth of new business. (…)

The resulting input shortages and delivery delays led to a solid upswing in purchase price inflation, as demand exceeded available supply. Average input costs rose at the quickest pace since June 2022 and at one of the fastest rates in the 28-year survey history. (…)

Average output charges rose at the sharpest rate in 45 months, as manufacturers passed on part of the increase in costs to clients. Backlogs of work meanwhile rose for the third month running.

Superimposed on the above:

U.S. and Iran Are Locked in a Stalemate That’s Neither Peace Nor War The two sides are far apart from a deal but also don’t want to resume fighting

The U.S. and Iran are locked in a diplomatic stalemate over issues that have bedeviled the two sides for years, as the conflict settles into a gray zone that is neither war nor peace.

The cease-fire is entering its second month and, despite sporadic violence, has now lasted almost as long as the fighting which preceded it. There is little to indicate that either the U.S. or Iran is ready to compromise, but neither wants to start fighting again.

President Trump on Monday warned that the cease-fire with Iran is “on life support” and said he wouldn’t back off his goal of pressing Iran to abandon its nuclear program. Trump told reporters at the White House that Iran believed he would get tired or bored of the conflict, or feel pressure to end it because of rising energy prices.

“But there’s no pressure,” Trump said. (…)

• Iran Thinks Trump Is Bluffing The regime figures it can outlast the U.S. on the Strait and uranium.

The WSJ Editorial Board:

(…) By clinging to the cease-fire through it all, Mr. Trump sent the wrong signal. Iran’s regime clearly thinks it can outlast a President who no longer wants the fight. “They think that I’ll get tired of this or I’ll get bored, or I’ll have some pressure,” Mr. Trump recognized in his Monday remarks, “but there’s no pressure at all. We’re going to have a complete victory.”

The problem is that he is under pressure, and everyone knows it. Why else is the President now talking about pausing the gas tax? Mr. Trump is right about the regime’s perception of him, but he’ll have to prove it wrong. (…)

This is a regime that thinks it can absorb economic pain from the U.S. blockade longer than Mr. Trump can tolerate higher prices for oil and petrochemicals. Mr. Trump will have to persuade Tehran’s leaders they’ve underestimated him—and the pain.

While most pundits talk of a potential inflation flare, the biggest danger is in severe and persistent shortages of materials, resources, and components that will broadly impede production across the world. To wit:

• Wood Mackenzie expects aluminum prices to rise to around US$3,500 per tonne in 2026 due to supply deficits.
• Semiconductor makers face supply risks as Qatar helium supplies may take a while to return to pre-war levels, potentially hampering AI chip production.
• The effective closure of the Strait of Hormuz has jeopardized over 25% of the world’s helium supply (primarily from Qatar). Helium is indispensable for semiconductor lithography and cooling; without it, chipmakers face capacity constraints.
• Reports emphasize that the war has exposed a “security of supply” crisis for raw materials needed for the green transition, such as nickel and lithium. Morgan Stanley predicts an 80,000-ton shortfall in lithium carbonate equivalent (LCE). This is directly increasing the cost of U.S. power grid upgrades and electric vehicle production.
• Roughly 50% of the world’s seaborne sulfur trade transits through the Strait of Hormuz. China, the world’s top sulfuric acid producer, implemented export bans in May 2026.
• Sulfur is the primary ingredient for sulfuric acid, used to make phosphate fertilizers.
• Sulfuric acid is essential for leaching metals like copper, nickel, and cobalt.
• In Chile, sulfuric acid prices have more than doubled, threatening the production of copper needed for global electrification.
• High-purity sulfuric acid is a critical “workhorse” chemical in chip manufacturing. Analysts at The Soufan Center warn that the sulfur shortage is now a direct threat to the global defense industrial base.
• While the United States produces about 90% of its sulfur domestically, the current global “sulfur shock” is beginning to impact the U.S. economy through price contagion and supply chain friction.
• Shortages of yttrium and scandium—vital for defense tech and aerospace—are worsening, with some suppliers reportedly turning away clients as of late February 2026.
• A key pain point is yttrium, used in coatings that keep engines and turbines from melting at high temperatures. Without regular application of these coatings, engines cannot be used. Some coatings manufacturers are also now starting to ration material, according to company executives and traders. Executives at two North American firms that buy yttrium to make coatings told Reuters they have needed to temporarily pause production due to shortages. One is also now turning away smaller and offshore customers in order to conserve supply for larger clients, which include certain engine makers.
• U.S. semiconductor makers are running low on scandium, putting production of next-generation 5G chips at risk, said Dylan Patel, founder and CEO of research firm SemiAnalysis. (…) scandium plays small but important parts in fuel cells, specialty aluminium aerospace alloys and advanced chip processing and packaging. Major U.S. semiconductor manufacturers all rely on scandium for making chip components that “go into essentially every 5G smartphone and base station”, Patel said.