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Market Update


The headline inflation rate came in at 3.8% for April, the highest reading in nearly three years, according to the Bureau of Labor Statistics. That number is being driven largely by energy costs tied to the ongoing conflict in the Middle East, with gasoline up over 28% from a year ago and fuel oil up more than 54%. Producer Price Index, meaning what businesses pay before they pass costs on to you at the register, jumped 6.0% annually, the largest surge since December 2022. That gap matters because wholesale inflation tends to reflect consumer inflation a few months down the road.


What makes this moment different from prior inflation spikes is what is happening to expectations. University of Michigan survey data showing that Americans' long-run inflation expectations jumped to 3.9% in May, the highest level since the early 1990s. When people expect prices to keep rising permanently, they start behaving differently. Workers demand bigger raises, landlords hike rents early, and businesses raise prices before their costs even arrive. That cycle is very difficult to stop once it starts, and the data suggests it may already be taking hold.


The Federal Reserve held interest rates unchanged for the fourth straight meeting in April, keeping them in the 3.50% to 3.75% range. New Fed Chair Kevin Warsh takes over on June 16 with no easy path forward. Cutting rates risks making inflation worse and signaling that the Fed is not serious about fighting it. Holding rates or raising them risks pushing an already stressed consumer over the edge. Meanwhile, the bond market is not waiting around. The 30-year Treasury bond yield broke above 5% in May, a level not seen in nearly two decades, and the 10-year sits at 4.56%. Those numbers feed directly into mortgage rates, car loan rates, and what businesses pay to borrow. In short, money is getting expensive to borrow across the board.


Recently, the jobs market looks okay. April added 115,000 jobs, which beat expectations. But DiMartino Booth highlights what is happening beneath that number. February's job count was quietly revised from a loss of 133,000 to a loss of 156,000, and over 800,000 Americans fell into fresh financial distress in April alone according to the Bureau of Labor Statistics household survey. For the first time in 65 years of University of Michigan survey history, more than half of Americans, 57%, spontaneously said that high prices are actively eating into their household finances right now. That figure never reached 50% even during the worst of the 1970s inflation crisis. Rather than rushing to buy things before prices go up further, which is what tends to


happen during a true inflation panic, people are doing the opposite. They are deferring purchases because they simply cannot afford them. More than half of households expect their income to stay flat or go down over the next year.


HUE, which stands for Higher Unemployment Expectations, and reflects how many Americans think unemployment will rise in the coming months. That reading hit 65% in May, and got worse as the month went on, climbing from 61% in the first half to 69% in the second half. That second half reading is one of the worst on record going back to 1960. When roughly two out of three Americans expect layoffs, they tend to stop spending immediately, even before any actual job losses occur, in order to protect themselves. That pullback in spending then slows the economy further and makes the job losses they feared more likely to happen. It becomes a cycle that feeds on itself.


Perhaps the most important tension is between corporate profits and consumer health. Corporate profits hit an all-time record share of the overall economy in the fourth quarter of 2025, even as consumers reported the worst financial stress in the history of the University of Michigan survey. Companies have been able to protect their margins by raising prices, but that only works for as long as people keep buying. When stretched consumers stop spending, revenues fall, profits come down, and the earnings forecasts currently holding up the stock market will need to be revised sharply lower. The companies have not felt that yet. But the consumer data strongly suggests they will.


Putting it all together, inflation is likely to stay elevated through the summer, the Fed will probably hold rates steady in June, and cracks in consumer spending are likely to start showing up in company earnings reports in the second half of the year. We think unemployment drifts higher toward 4.5% to 5% and a mild economic slowdown becomes increasingly likely by late 2026 or early 2027. The main wild card on the upside is whether the Iran conflict resolves and brings gas prices back down. On the downside, if inflation expectations keep rising and the Fed loses the confidence of the bond market, the country could find itself in an environment where growth is stalling and prices are still climbing at the same time.


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