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Elevated energy prices putting intense upward pressure on input prices around the globe

Robert Brusca

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The French manufacturing climate index improved in May, rising to 102.3 after climbing to 100.4 in April from 99.4 in March.

Despite the improvement, the standing of the climate index is only at its 50.4 percentile, leaving it just slightly above its historic median on data back to 2001. Industry climate now is still slightly lower than it was in January 2020, just before COVID hit.

The survey components tell a mixed story about prospects for industry in France. Manufacturing production expectations improved slightly in May, moving to -17.0 from -17.4 in April; however, both readings were sharply weaker than the value in March. The standing of production expectations in May is at its 25.4 percentile, marking it as just a hair above its lower quartile when ranked on data back to 2001. This is a weak and uninspiring showing.

The recent trend of production is much more upbeat, rising to 14.3 in May from 3.6 in April. It also shows a sharp improvement compared to a year ago, when the value was 3.7. Its standing is significantly above its historic mean, and the ranking for this May observation is at its 82nd percentile—a solid showing. It is the strongest response in the survey among demand and activity variables. But can that trend hold?

The personal likely trend, in which survey respondents respond to prospects for their own firms and industries, shows much less ebullience, with the May reading of 4.4 and a steadily diminishing trend from March to April to May. The personal likely trend is still stronger than a year ago, when it was -3.1, although it is significantly below its historic mean, with a ranking at its 28th percentile. It is a reading that is nearly completely decoupled from the recent trend responses in this same survey.

Orders and demand in May improved to -14.1 from -15 in April; in April, the index had improved from -18.2 in March. There is a similar trend and improvement for foreign orders and demand as well. Both overall and foreign demand are improved compared to a year ago; both are stronger than their historic means, and each of the series has a ranking in its 61st percentile—above their respective historic medians with some margin, enough to say the responses look firm. Yet, there is not enough to say they look strong. Both readings are still below their levels in January 2020, before COVID struck.

The INSEE survey also includes two observations on prices: the own-likely price trend and the manufacturing price trend. Both have been moving up sharply from March to April to May; both are significantly above their year-ago levels and relatively strong compared to their historic means. Both series also have high percentile rankings, with the own-likely price trend at a 90.2 percentile ranking and the manufacturing price level at an 88.5 percentile ranking. Both are also substantially above their levels of January in 2020, before COVID struck.

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**Summing up**
What we're seeing in this survey is some signs of strength from the recent production trend; however, pessimism by respondents about their own industry is an offset to that. There is some firmness in overall orders & demand and foreign orders & demand, but it's not yet strong and the outlook for prices and inflation is a considerable negative. With rising oil prices, the outlook for inflation is not surprising, and we're going to have to wait and see what tactics the European Central Bank takes in order to have an idea how hard this might hit the economy. Industry climate and order demand have been creeping up, but the weakness in manufacturing production expectations is a sharp counterpoint to keep in mind. In short, the INSEE manufacturing survey has a number of contradictions and significant question marks that should make us wary about the outlook.

France

INSEE: French Manufacturing Rebounds Amid Weakness

Michael J. Moran

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The Conference Board’s index of Consumer Confidence inched lower in May (off 0.7%), but the change occurred from an upward revised level in April (firmer by 1.1%). These changes continued the recent pattern of modest month-to-month shifts, although the headline index lost noticeable ground during 2025, leaving recent readings in the low end of the range for the current expansion. From a long-term perspective, the current index value of 93.1 was nearly equal to the average of 92.9 from 2000-2025.

A drop in assessments of the present situation led the decline in May, with this component falling 2.6%. The expectations index improved slightly, increasing 1.4%. This pattern matches the usual cyclical shifts, as the index for the present situation shows wide swings between peaks and troughs. Usually, however, the pronounced declines do not occur until the economy has entered a recession. The change in the past year or so has been large for an economy still in a business expansion.

The uncomfortable inflation setting has most likely influenced the views of consumers, which is evident in the inflation expectations question in the survey. The median view on inflation 12 months hence totaled 5.2% in May, down 0.1 percentage point from April, but well above readings near 4% in 2024 and in the calmer environment before the pandemic. Inflation concerns were more intense last year when tariffs were in the news (median inflation expectation of 5.9% in April 2025), but 5.2% is still hefty.

The labor market does not have the vigor it did in 2024 and early 2025, and that change has probably influenced assessments of the present situation. However, individuals still have a slightly favorable view of the job market. The share of respondents viewing jobs as plentiful totaled 25.5% in May, while 18.6% viewed jobs as hard to get. The differential of 6.9 percentage points, like the present-situation index, is low for an expanding economy, but it is far above readings seen in past recessions.

The results from the Conference Board survey of consumers differ markedly from those of the University of Michigan Survey Research Center. The Michigan results show consumer sentiment at a record low, while the Conference Board index essentially matches its long-run average. The difference most likely reflects the nature of the questions in the surveys. The Conference Board focuses on business and employment conditions, while Michigan emphasizes personal finances. The focus on finances, along with questions on inflation, probably picks up concerns about affordability.

The Consumer Confidence data are available in Haver’s **CBDB** database. The total indexes, which are indexed to 1985=100, appear in **USECON**, and market expectations are in **AS1REPNA**.

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- Assessments of the present situation slipped, but views were still above long-run norms.
- Expectations improved slightly in April, but they are still below the long-run average.

Consumer Confidence: Slightly Lower in May

Winnie Tapasanun

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The Chicago Fed National Activity Index (CFNAI) rose to +0.14 in April from -0.15 in March (-0.20 initially) and +0.09 in February (+0.03 previously), today’s report from the Federal Reserve Bank of Chicago showed, indicating economic growth increased to its highest level since March 2025. The April CFNAI marked the third positive reading in four months and the first m/m rise since January; it was above a low of -0.49 in October 2025 and a reading of -0.36 in April 2025 but below a high of +0.39 in February 2025.

The index's three-month moving average (CFNAI-MA3), which smooths out the m/m volatility in the index, inched up to +0.03 in April from +0.02 in March (-0.03 initially), marking the third consecutive positive reading following nine straight negative figures. However, it was slightly below +0.06 in April 2025 and a high of +0.07 in February 2025. The CFNAI-MA3 is expressed in standard deviation units from zero (with a value of zero defined as trend real GDP growth). Research at the Chicago Fed indicates that an average reading of -0.70 or below is consistent with the economy being in a recession. Therefore, the April reading confirmed that the U.S. economy is not currently in a recession.

The April reading reflected m/m increases in two of the four CFNAI key components and two positive contributions. The contribution of the Production & Income index to the CFNAI rose to +0.18 in April, the highest reading since February 2025, from -0.13 in March; it was above -0.11 in April 2025 and a low of -0.61 in January 2024. The contribution of the Sales, Orders & Inventories index increased to +0.02 in April, the fourth positive reading in five months, from -0.03 in March; it was above its recent low of -0.17 in September 2025 and a low of -0.20 in April 2025. Meanwhile, the Employment, Unemployment & Hours index contributed -0.02 in April, down from a neutral value (0.00) in March but marginally above -0.03 in April 2025. The contribution of the Personal Consumption & Housing index fell to -0.04 in April, a three-month low, from 0.00 in March; it was below -0.03 in April 2025 and a high of +0.10 in March 2025.

The CFNAI Diffusion Index—which measures the breadth of change in the component series and is also a three-month moving average—improved to +0.06 in April, the highest reading since October 2022, following +0.03 in March (-0.04 initially) and negative readings during the March 2023 to February 2026 period. A reading of zero indicates that all of the indicators are growing at their long-term average. The April reading was above a low of -0.55 in October 2025 and -0.13 in April 2025 but below a high of +0.14 in September 2022.

The CFNAI is a weighted average of 85 indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

These figures are available in Haver's **SURVEYS** database.

- CFNAI +0.14 in April, highest since March ’25; -0.15 in March.
- Two of four CFNAI components up m/m; two make positive contributions.
- CFNAI-MA3 edges up to +0.03, third straight positive reading; above -0.70 (recession signal).
- CFNAI Diffusion Index rises to +0.06, highest since Oct. ’22.

Chicago Fed National Activity Index Turns Positive in April

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The U.K. distributive trades survey in retaliating for the second quarter of 2026 shows some improvement in the business situation expected over the next six months as that reading rose to -15 from -34 in the first quarter, putting it only slightly weaker than its third-quarter 2025 reading of -10. Still, it is a very weak reading.

The employment reading also improved in the second quarter to -30 from -40 in the first quarter. That reading, however, is still lower than its -19 reading in the fourth quarter and its -14 reading on the third quarters of 2025.

Capital spending plans on the quarter for the year ahead registered -52 in the second quarter, compared to -46 in the first quarter; this reading has steadily deteriorated.

Imports have improved slightly in the second quarter, with the reading at  7 compared to  10 in the first quarter and  13 in the fourth quarter.

The expected selling price compared to what it registered a year ago is at 42, compared to 40 in the first quarter; they compared to even stronger values at the end of last year. Expected employment in the second quarter fell sharply to -44 from -23 in the first quarter, and this reading has steadily and strongly deteriorated, particularly in the second quarter itself.

Comparing the trailing 4-quarter to 8-quarter averages shows clear deterioration across the board, except for prices. That clarifies the overall story and trend for retailing. 

The retail rankings are uniformly weak, with the exception that the selling price has a 43.6 percentile standing, which is still below its historic median ranking. However, the standings for imports, capital spending, and employment are all below the 10th percentile, with the business situation coming in an 11.4 percentile standing. The expected selling price has a 63.6 percentile standing, well above its historic median (the median occurs at a ranking of 50%). Meanwhile, employment, looking ahead, has only a 2.9 percentile standing, clearly not much of a vote of confidence in the outlook for the economy.

The wholesaling portion of the distributive trades report also registers weak standings, but they are higher than those seen in retailing, with the business situation at an 18.6 percentile standing, imports at a 25.7 percentile standing, and employment at a 17.1 percentile standing, while capital spending plans are at a very weak 5.7 percentile standing. All these metrics are generally stronger than for retailing; they're still poor readings and generally below their respective medians. The only exception is the selling price with a 77.9 percentile standing, which is only a vote of confidence for inflation. The expected selling price compared to a year ago has a 44.3 percentile standing, while employment expectations compared to a year ago are at a 35-percentile standing.

Similarly, in wholesaling as for retailing, the comparison of 4-quarter to 8-quarter averages shows across the board deterioration, except for prices. The distributive trades sector for retailing as well as for wholesaling is fading.

**Summing up**
The United Kingdom distributive trades survey is telling us clearly that it is a weak environment for the distributive trades. The standings of the current readings are weak, and the outlook and forward-looking portions of the survey are weak as well. The economy continues to fight inflation that has been over the top for some time, and inflation is still above target, keeping the BOE inflation-vigilant. Global conditions are mixed with the cutoff of goods shipments through the Straits of Hormuz impacting economies globally. The second quarter survey is a depressing statement on the state of the outlook for the U.K. economy.

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United Kingdom

U.K. Distributive Trades Survey Is Broadly Weak

Tian Yong Woon

In this week’s Letter, we examine the ongoing Middle East situation through another lens — namely, the fiscal costs it has imposed on Asian economies and the strains that are already beginning to emerge. While the recent surge in bond yields has largely been attributed to inflation-related concerns, yield spikes in some Asian economies have also arguably been driven by fiscal concerns, as governments step up bond issuance to finance support measures (chart 1).

In India, cracks are beginning to show in its fuel subsidy programme, with fuel prices now being raised as previously subsidised rates appear increasingly unsustainable, underscoring the inherently finite nature of such measures (chart 2). While Indonesia continues to hold the line by keeping Pertalite fuel prices unchanged, hikes in more premium fuel grades, coupled with the government’s broader slate of spending initiatives, have left investors increasingly on edge over the country’s fiscal sustainability (chart 3). In Japan, the cabinet is reportedly seeking to put together an additional budget to help cushion inflationary pressures stemming from the Middle East conflict. Although the Prime Minister has sought to allay concerns over additional bond issuance, broader fiscal concerns remain (chart 4).

Against this backdrop of fiscal strain , inflation risks, and geopolitical instability, it is also important to keep in mind the growth-supportive factors still in place across parts of Asia. In particular, the ongoing AI upcycle continues to support exports in several regional economies (chart 5). Taking these crosscurrents into account, we then turn to the week ahead, where central banks will continue to navigate the trade-off between growth and inflation amid a heavy slate of upcoming data releases, particularly across East Asia (chart 6).

**Bond markets**
Global yields have remained elevated, although some pullback has been seen in recent days (chart 1). Inflation-related concerns arising from elevated oil prices linked to the Middle East conflict remain front and centre and are still widely cited as the main driver of the recent spike in nominal yields. However, other factors are also at play, particularly in certain economies. Contributing to the rise in yields in some economies are fiscal concerns. Regarding the US-Iran situation, hopes for a peace deal have once again been raised in recent days, only to be subsequently dampened, underscoring how little concrete progress has ultimately been made. In addition, fresh US strikes on Iranian missile launch sites and boats highlight the continued fragility of the situation. On balance, the world remains stuck in a state of limbo, holding its breath for a positive peace outcome — particularly the reopening of the Strait of Hormuz — while the economic effects of its closure continue to weigh on the global economy.

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**India**
Given the fallout from the closure of the Strait of Hormuz and the subsequent surge in energy prices, several Asian governments have scrambled to contain the strain on household expenses through various measures. In turn, the sharp rise in energy costs has also heightened upside risks to inflation. One common and direct approach has been to cap energy prices, effectively subsidising end-consumers against rising costs. However, as mentioned before, while such measures can provide immediate relief, they are rarely sustainable and often come at significant cost. One example is India, which had largely maintained fixed fuel prices until recently, when state-run refiners started to raising prices for the first time in four years (chart 2) amid extremely elevated oil prices. The move highlighted the limits of fuel subsidies, given their increasingly costly nature especially when the gap between subsidised prices and actual market prices remains excessively wide for a prolonged period, ultimately resulting in sustained financial losses.

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**Indonesia**
Indonesia has taken a similar approach in attempting to shield households from volatile oil prices, particularly through its subsidised Pertalite fuel programme. While the government has pledged to keep prices of Pertalite — the country’s most widely used fuel grade — unchanged through 2026, unsubsidised premium fuel grades such as Pertamax Turbo have already undergone multiple rounds of price hikes, rising by roughly 50% so far, broadly in line with the proportional surge in crude oil prices (chart 3). The persistent fiscal burden of such subsidies, coupled with the current administration’s costly policy ambitions — including its free school lunch programme — has brought renewed attention to Indonesia’s near-to-medium-term fiscal health. Such concerns have, in part, already been reflected in the rupiah’s prolonged weakness and credit outlook downgrades by certain ratings agencies, although other contributing factors are also at play. Adding another layer of policy uncertainty is the government’s recent move to centralise control over commodity exports, which, while arguably well-intentioned, leaves significant room for business uncertainty, particularly regarding how such centralisation will ultimately be implemented.

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**Japan**
Turning to Japan, the government is facing similar challenges in balancing economic support measures against mounting fiscal concerns amid the Middle East conflict. Prime Minister Takaichi’s cabinet is reportedly considering an additional budget worth roughly $19 bn to cushion the economic fallout from higher prices stemming from the crisis, with part of the package expected to fund utility and gas subsidies, among other measures. While such policies may help mitigate some of the growth drag arising from the conflict, they also revive longstanding concerns over fiscal sustainability. That said, Takaichi has stated that the supplementary budget will not lead to additional bond issuance, as some issuance planned under last fiscal year’s budget will likely be cancelled following higher-than-expected tax revenues and unspent allocations elsewhere. Nevertheless, fiscal concerns are likely to persist, given that the existing issuance pipeline remains elevated relative to pre-pandemic levels (chart 4).

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**The exports cushion**
Yet even as the Middle East conflict threatens to impose fiscal strains, lift inflation readings, and push inflation expectations higher, pressure on central banks to maintain tighter monetary policy has also increased. Despite these headwinds, a key driver of growth continues to provide a cushion for several Asian economies in the form of still-robust AI-related demand. Many Asian economies remain well-positioned within the global AI supply chain, allowing them to capture meaningful economic benefits from the ongoing AI investment and buildout cycle. As shown in chart 5, exports of AI-related goods — including semiconductors and integrated circuits — have surged across several Asian economies this year, contributing positively to overall growth as these economies participate in the current AI upcycle. However, this also presents a double-edged dynamic. Economies that become overly reliant on AI-related demand as a primary growth engine may face future vulnerabilities should that demand weaken materially. While the current oil shock has not yet significantly dampened AI-related demand, it remains uncertain whether softer demand for AI goods could eventually emerge as a second- or third-round effect of persistently elevated energy prices.

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**Week ahead**
Asia faces an exceptionally busy week, with key releases from China and Japan alongside policy decisions from the Bank of Korea and the Reserve Bank of New Zealand. In China, markets will closely watch the official May PMIs and April industrial profits data for signs of whether the recent run of disappointing economic releases is persisting. Japan’s calendar includes industrial production, retail sales, and household spending figures, all of which should provide further insight into the state of domestic demand and broader economic momentum. The week also brings several key interest rate decisions, most notably from New Zealand and South Korea. Like many central banks across Asia, both the Reserve Bank of New Zealand and the Bank of Korea are facing growing pressure to place greater emphasis on upside inflation risks and elevated inflation expectations, even at the potential expense of growth, thereby increasing the case for further policy tightening. Several public holidays across the region may also thin market activity at various points during the week.

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Asia

Economic Letter from Asia: Fiscal Strains 

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GfK consumer climate for Germany improves slightly to -29.8 in June from -33.1 in May. In terms of monthly point changes, it's a reasonable improvement month-to-month however this is now the 10th weakest monthly consumer climate reading over the last 25 years and so it's an extremely weak reading. Last month was an even   weaker reading, but that was the 7th weakest reading all time for this index. All the other even weaker readings were during Covid. This is a very weak report, it ranks 286th out of 296 observations.

**A very weak month despite some technical improvement** 
GfK projects a climate figure for June, however, it's underlying data for components are up to date through May. As of May, economic expectations improved slightly to -11.2 from -13.7. Income expectations improved a lot more to -13.0 from -24.4. However, that -24.4 figure was a collapse from -6.3 the month before, so that the rebound in May still leaves a significant net decline over the last two months. We should not be too focused on the month-to-month improvement. Income expectation’s April reading was likely a shock reaction to global events in the Middle East. The propensity to buy index improved to -13.2 in May from -14.4 but once again it's a case of there still being a 2-month decline on the books since the March reading was -10.9 for the propensity to buy. The even weaker propensity to buy readings historically were all in the wake of Covid.

**Very weak rank standing**
On the whole it's another week reading from the GfK survey. This is further underscored by the rank- or the count-percentile standing of the headline which stands in its lower 3.1 percentile. Economic expectations are in their lower 19th-percentile, income expectations are in their lower 13th-percentile and the propensity to buy is in its lower 23.9-percentile. All of these are rankings that are infrequently weaker than their readings in May.

**Select European comparisons**
As a comparison I include the most up-to-date readings for Italy, France, and the UK on confidence. Italy and France have up-to-date readings through April; the UK has an up-to-date reading through May. The three countries all show declines in confidence from April to May; the UK shows a slight improvement from May to June. If we look at the most current readings, the percentile standing for Italy is a 50-percentile standing, which implies that the current reading is right on top of its median. For France it's a 5.8 percentile standing, marking the reading as weaker less than 6% of the time. For the UK, the May standing is a 26.5 percentile standing, just above the lower quartile of its historic queue of data.

**Wrap up**
There was nothing reassuring in these data. The economies are struggling as we saw in the S&P PMI data from yesterday from the early reporters of PMI statistics. Of course, the inflation data are uniformly poor globally, so it remains a difficult time and the consumers are feeling a good deal of pressure from inflation and a certain amount of economic uncertainty.
 


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Germany

German Confidence in June (GfK) Remains Extremely Weak

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Housing starts fell 2.8% in April, but the drop followed a jump of 12% in March that had pushed activity to one of the firmest levels of the past few years. Even with the decline in April, starts remained in the upper end of the recent range. In fact, March and April combined brought the best two-month performance since late 2023.

The housing sector has been generally soft in the past few years. Activity was strong in late 2020 and 2021 as the economy recovered from the pandemic and as low interest rates boosted affordability. However, the market cooled in 2022 as the Fed tightened monetary policy, and home construction has been lethargic since then. The contribution of residential construction to GDP growth has been negative in seven of the past eight quarters (subtracting 0.1 percentage point on average). The improvement in multi-family activity offers the prospect of a positive contribution in the quarters ahead, but it would probably not be a large one. Single-family activity has a heavier weight in residential construction, and recent results have not been firm enough to suggest meaningful gains.

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Multi-family construction led the advance in the past two months, increasing 14.7% in March and 10.3% in April. The trend in multi-family starts had been moving sideways for a time (note the 6-month average in the left chart), but recent gains have quickened the pace, perhaps renewing the upward drift that began in 2024. Single-family construction stirred in March (up 10.7 percent), but it gave back much of the advance with a decline of 9.0% in April. Still, the six-month average of single family starts is tilting upward, although only mildly so.

The slight pick up in single-family starts is encouraging, but recent movement in building permits suggests caution. Single-family permits fell in both March and April, offsetting a hint of improvement in February and leaving little change in the six-month average (chart, lower right). Multi-family permits have moved erratically in recent months, but they are drifting higher on average.

The housing starts and permits figures can be found in Haver’s **USECON** database. The expectations figure is contained in the **AS1REPNA** database.



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- March & April brought the best two-month performance since late 2023.
- Multi-family activity has led the advance; single-family activity lags.


Housing Starts: Hints of Improvement

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You may recognize the excerpted headline quote as "borrowing" from US Admiral David Farragut. It is a famous quote from a US Civil war battle in which he charged ahead in his ship regardless of the risk. This month the global manufacturing PMIs themselves are charging ahead regardless of the rise of inflation, the war in Ukraine, the war in Iran, the closure or impedance in the strait of Hormuz, and the mucking up of oil and nonoil supply lines. Full speed ahead! 

**Trend…**
The chart shows an ongoing recovery in manufacturing. It also shows that conditions are only ‘better’ and not ‘strong.’  Yet when we rank these individual PMIs against their historic results back to January 2022, the median rank across these 18 reporters is 90.8-percent, signaling that they have been higher less than 10% of the time back to 2022. Of course, 2022-2023 represented low points for manufacturing after Covid. There was a strong recovery from Covid and then the sucker-punch from the invasion of Ukraine by Russia. Nonetheless on that timeline recovery is still in progress and – so far- not even the Middle East war and other geopolitical turmoil, including a real donnybrook within NATO, has sidetracked it despite the impact on oil prices. That may not last, but it is the current situation.

**A test for central banks**
With inflation rising central banks are being put to the test. They failed the post Covid test and waited too long to hike rates. We did get recovery but inflation, too. Will they do that again? Or will they hike rates sooner? Will they try not to make the same mistake and make, instead, a new mistake by getting too tight too soon? Markets simply do not know. But in the US and UK there are five years of missing monetary inflation targets and in other key countries the inflation targets also have been broadly missed even if headline inflation recently had dipped into the target range in the last few months or so. Central banks are facing a challenge after their last challenge was not met with success and after a relatively long period – a solid legacy- of missing on the promises they made to the public on inflation. 

**Solid PMI trends:** The sequential, as well as the current, monthly data show how widespread change has been tilted in a positive direction. While conditions are broadly better, the current month’s median reading is only at a PMI value 52.4. So, manufacturing conditions are only slightly above breakeven (a PMI of 50) but they have been weak for so long that this is an exceptionally strong reading compared to the last four and half years of results. 

**Some examples:** The weak manufacturing readings on the month by ranking are for Turkey, Russia, India, and Indonesia. However, these are own-PMI comparisons and India is one of the strongest readings in April on a cross-section basis (Compared to other countries in April, rather than to its own history) having the third strongest manufacturing reading in April. Malaysia, South Korea. Taiwan, and Japan each have the strongest readings (or nearly so) since January of 2022; as a result, Taiwan and Japan also rank one and two among 19-reporter readings in April. South Korea ranks sixth, But Malaysia has been so weak it still ranks only 11th despite a 99.2% high-low standing.

**In Sum:** The bottom line is that recovery has not been derailed. Yet… But this is only an April report. And, given time, this rebound could be untracked. It is only a rebound from the lows. So, the expansion is still at risk even with global labor markets still tight based on unemployment readings. Economic growth is a slippery slope; the trend is only your friend until it turns on you. 


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Global MFG PMIs Sweep Higher: Damn the Torpedoes!

Andrew Cates

**Europe’s vulnerability to high energy prices**
The latest flash PMI data continue to highlight a highly uneven global economy. India remains exceptionally strong, while the US and Japan continue to outperform most other advanced economies. By contrast, much of Europe remains considerably weaker, with France particularly soft and both Germany and the broader euro area struggling. In many respects, this divergence increasingly reflects Europe’s heightened sensitivity to elevated energy prices and, probably, its weaker exposure to the global AI investment boom currently supporting activity elsewhere. Europe remains far more vulnerable to higher imported energy costs, while the US and parts of Asia continue benefiting from stronger technology investment cycles, semiconductor demand and AI-related infrastructure spending.

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**Higher energy prices continue to squeeze US consumers**
That said, rising gasoline prices in the US are clearly weighing on household sentiment. Consumer confidence, as measured by the University of Michigan survey, has fallen sharply even as labour markets remain relatively resilient, underscoring how sensitive households might be to renewed energy-related inflation fears. Yet this also reinforces an important counterpoint to the current inflation narrative. Unlike during the immediate post-pandemic period — when households were benefiting from extraordinary fiscal transfers, ultra-loose monetary policy and strong nominal income growth — consumers today appear more cautious and demand conditions far less exuberant.

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**Not yet another pandemic-era liquidity shock**
Indeed, and as noted above, one of the most important differences between today’s inflation fears and the post-pandemic inflation surge concerns the underlying monetary backdrop. During the Covid pandemic, central banks massively expanded their balance sheets while governments simultaneously delivered extraordinary fiscal stimulus. That combination arguably helped fuel excess liquidity, surging demand and ultimately broad-based inflationary pressures. Today, however, the picture looks fundamentally different. Central bank balance sheets across the US, euro area and Japan are no longer expanding at anything like the pace seen during the pandemic period, with reduced asset purchases contributing to a much less supportive global liquidity backdrop.The global economy is therefore entering this latest energy shock against a backdrop of greater monetary restraint, or, at the least, far less extreme monetary accommodation.

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**Broad money supply growth is not (yet) amplifying inflation concerns**
The contrast becomes even more striking when looking at broad money growth. Broad money growth across the major economies has slowed dramatically from the extraordinary rates seen during the pandemic period. In both the US and euro area, monetary growth remains subdued, reflecting tighter financial conditions and a much less supportive liquidity backdrop. This matters because periods of sustained inflation persistence have historically been associated not simply with commodity price spikes, but with strong underlying money and credit growth supporting broader demand conditions. Today’s monetary backdrop looks – for the time being - far less consistent with the kind of prolonged inflation spiral feared by many investors.

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**AI investment is becoming a full-scale infrastructure cycle**
At the same time, however, the global growth outlook is not being shaped solely by cyclical weakness and tighter monetary conditions. There remains one extraordinarily important countervailing force: the ongoing AI infrastructure boom. The scale of investment associated with artificial intelligence increasingly resembles a modern industrial boom rather than a conventional software cycle. Real US private investment in data centres has surged dramatically as hyperscalers race to build computational capacity, cloud infrastructure and AI training systems. Yet perhaps equally striking is the parallel surge in water supply construction spending. One of the great misconceptions surrounding AI is that it somehow belongs to a virtual economy detached from physical resource constraints. In reality, AI infrastructure is extraordinarily resource intensive, requiring vast quantities of electricity, cooling systems, water infrastructure and industrial-scale construction. Increasingly, the AI boom is colliding directly with broader questions surrounding energy systems, utility capacity and physical infrastructure constraints.

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**The AI cycle continues to drive global trade and investment**
Finally, the implications of this infrastructure boom are increasingly becoming visible globally through the semiconductor supply chain. South Korea’s semiconductor sector continues to provide one of the clearest real-time indicators of the scale and intensity of AI-related investment demand. Semiconductor export growth has accelerated sharply, while producer prices for semiconductors have also surged, reflecting exceptionally strong global demand for advanced chips, memory systems and computational infrastructure. In many respects, this remains the key counterweight supporting global equity markets and broader investor optimism despite ongoing geopolitical and inflation concerns. Even as parts of the global economy slow under the weight of higher energy prices, the AI-driven capex cycle continues to fuel trade, infrastructure spending and corporate earnings. Increasingly, markets appear willing to tolerate elevated bond yields, geopolitical tensions and energy volatility because investors remain convinced that AI-related productivity gains and infrastructure investment could ultimately transform the medium-term growth outlook. The result is a global economy increasingly caught between two competing forces: old-world supply-side inflation risks and one of the largest technology-driven investment booms in modern history.

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The global macro backdrop remains dominated by instability in the Middle East and the lingering inflation concerns associated with elevated energy prices. Yet recent days have at least offered some tentative relief. Oil prices have softened amid heightened hopes that negotiations between the US and Iran could eventually ease tensions and help stabilise energy markets, even if the broader geopolitical situation remains fragile and key shipping routes continue to face disruption. Against this backdrop, the latest survey data continue to highlight an uneven global economy, with Europe looking particularly vulnerable given its greater sensitivity to higher energy costs and its weaker links to the global AI investment boom (chart 1). At the same time, rising gasoline prices continue to weigh heavily on US household confidence (the Michigan measure), raising concerns about the resilience of consumer demand (chart 2). An important question confronting markets in the meantime is whether inflation fears are now becoming overstated. Unlike during the post-pandemic inflation shock, central bank balance sheets are now shrinking rather than expanding aggressively, while money supply growth remains relatively weak across many major economies (charts 3 and 4). Meanwhile, the extraordinary boom in AI-related infrastructure spending — spanning data centres, utilities, water systems and semiconductors — continues to provide a major offset to broader macroeconomic weakness and remains a key pillar supporting global equity markets despite elevated geopolitical and inflation concerns (charts 5 and 6).

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Charts of the Week: The AI Boom Meets Inflation Angst

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