Sharply rising share of AI-related jobs

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

Cost of transporting crude oil has soared to series high

Market-based inflation expectations have not yet reflected recent surge in oil prices

Global equity markets are fearing a major economic disruption from soaring oil prices

Is recent drop in sentiment signaling softer growth ahead?

With the Iran conflict, geopolitical risk has soared to alarming levels

Soaring AI-related investment in US underpinning strong contribution of business spending to overall growth

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

Global freight costs are on the rise while supply chain pressures are contained

Accelerating positive economic surprises in the G10 are boosting the global economy

Considerably more monetary ease expected from US and UK as Japan tightens

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

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Ethan Harris

The surge in inflation in March is likely to be repeated in April and will continue as long as the Straits of Hormuz remains closed and energy inventories get tighter and tighter. The FOMC and its prospective new Chair have some work to do if they want to restore the Fed’s anti-inflation credibility.

The Cleveland Fed publishes a “nowcast” for the next CPI and PCE inflation releases. For the core they simply extrapolate the recent trend. However, for food and energy they look at actual daily data and hence they get a good estimate of what headline inflation will look like.

[https://www.clevelandfed.org/indicators-and-data/inflation-nowcasting](https://www.clevelandfed.org/indicators-and-data/inflation-nowcasting)

Recall that the consumer price survey is taken over the course of the month. Hence it reflects average prices rather than end-of-month prices. This is important today because food and energy prices rose over the month of March. Hence as the chart below illustrates, the CPI for gasoline will be higher in April than in March.

260501EH1.jpg

Source: U.S. Energy Information Administration

The chart below shows the nowcast for annualized April and May inflation. For both months the headline measures are running at about 4.5-4.5% and the cores are in a 2.5 to 3.3% range. The cumulative overshoot for the PCE since 2021 is 11% and rising.

260501EH2.jpg

**Fed forgiveness**

And yet, the Fed seems to be in a forgiving mood.  There is a dovish asymmetry in the way the Fed has responded to under- and over-shooting its target. In 2015-20 inflation was persistently below target. As the chart below shows, this caused inflation expectations to dip below the 2005-14 average, a period of on-target inflation. The Fed was worried about an “unanchoring” of expectations to the downside. Hence, in their new 2020 “Framework” they adopted “inflation averaging,” explicitly seeking average inflation of 2% over time. Consistent with this, they sought a modest overshoot of the target to make up for some of the prior undershooting, nudging inflation expectations back to normal.

260501EH3.jpg

Now the Fed faces the opposite problem—an even bigger overshoot to the upside along with a rise in survey measures of inflation expectations. In response, in the 2025 Framework, the Fed dropped inflation averaging. This confirmed that they were not seeking a modest undershoot of the target, but only trying to return to target. The cumulative overshoot was treated as water under the bridge. As I pointed out at the time the shift made it appear that 2% was now a floor, suggesting inflation would average more the 2% over the long term.

**What will Warsh do about it?**

Kevin Warsh’s harshest critique of the Powell Fed is that it allowed inflation to run out of control so long that it seriously damaged its anti-inflation credibility. He argues that this failure is the real threat to Fed independence (not political pressure or threatening to put Fed officials in jail). 

Warsh also argues that he is the man to restore the anti-inflation credibility of the Fed. What would that mean in practice? In the current context that means having a hawkish bias in several key respects:

•	As I suggested above, seek to return inflation to target ASAP and ideally modestly undershoot the target.
•	Focus more on the inflation risks from the energy price shock than on the growth risks. Both risks matter, but this latest surge in prices could be the final straw in the unanchoring of inflation expectations. 
•	Look at a range of measures of core inflation rather than zero in on the currently softest core metric, the trimmed mean.
•	Don’t wait for a potential productivity surge to solve the inflation problem.  Make sure policy is tight enough to lower inflation on its own.  If the productivity surge happens, the Fed can ease, but also let the productivity surge (and lower unit labor costs) lower inflation modestly below the target.
•	Be sure to start shrinking the balance sheet before cutting rates to avoid a short-term easing.
•	Finally, “caucus” with the three FOMC hawks who argue for a symmetric rather than a dovish directive.

Unfortunately, Warsh has not discussed any of these concrete steps as part of his “reform” agenda. Indeed, most of his commentary in the last year suggests he will join Governor Miran as an “uber-dove.” 

The bond market is not concerned about inflation. It continues to price in a quick return of inflation to target. For example, 5-year inflation “breakevens” continue to bounce around the implicit 2.4% target for the CPI (chart). I hope the market is correct, but I continue to see upside risks to both breakevens and nominal bond yields. The Fed and its prospective Chair have some work to do.

260501EH4.jpg

US Inflation: the Fed has more work to do

Joel Prakken

The report from the Bureau of Economic Analysis on the “core” inflation rate for personal consumption expenditures (PCE) in March was concerning. The monthly change in that price index was 0.4% for the third consecutive month, for a 3-month annualized change of 4.4%! The 12-month change climbed from a recent low of 2.7% in October to 3.2% in March, well above the Fed’s 2% objective.  And don’t forget: the 12-month change understates inflation, given how the Bureau of Labor Statistics (BLS) treated shelter costs last October when a partial government shutdown prevented the agency from conducting its monthly survey of consumer prices.

A refresher. Lacking data for many items, BLS assumed their prices in October were unchanged from September. For most items this understatement was corrected the following month when November’s prices were correctly recorded, except for the price index for shelter costs.  

BLS calculates the monthly percent change in shelter costs as the 6<sup>th</sup> root of the percent change in shelter costs over the previous six months reported for one of six rotating panels within a larger sample of housing units. So, lacking survey data for October, the BLS assumed that shelter costs in October were the same as in April – the last time the panel scheduled to be surveyed in October was in fact surveyed – and then calculated October’s change in shelter costs as the 6th root of 0…equals 0! This understatement won’t be corrected until that panel is surveyed again in April. Until then, any change in shelter costs calculated over a span that includes October is missing a month of shelter cost inflation. If that span is less than a year but the change is annualized, then the understatement is annualized as well.

Let’s put numbers to this. The 6-month change in shelter costs was not recorded in October, but it was 1.65% (not annualized) in September. Let’s take that as an estimate of the true 6-month change in shelter costs for the panel that would have been surveyed had the government not been shut down. This implies that the price index for shelter costs has been low since October by 1.1065<sup>1/6</sup> – 1 ≈ 0.3%.  Shelter costs have a relative importance of 35% in the consumer price index (CPI), implying that the CPI currently is low by 0.35*0.1% ≈ 0.1%, as is the 12-month percent change in the CPI.

On May 12 the BLS will release the CPI for April. No doubt it will show pronounced effects of higher energy prices, both direct and indirect, resulting from the closure of the Strait of Hormuz.  However, it will also include the correction of the understated level of shelter costs. That correction will add approximately 0.1% to both the monthly and the 12-month percent change in the CPI, and slightly more than that to the corresponding measures of core CPI inflation.  The impact on the price index for core PCE is roughly half this, given the smaller weight of housing in PCE than in the items covered by the CPI. So not only will the correction for the understatement of shelter costs boost reported inflation, it also will push the monthly change in the CPI above that for the PCE price index. None of this is earth shattering, but it is another reason to expect May’s inflation numbers to be unfavorable.

On May 12, Don’t Forget the Correction of Understated Shelter Costs

Joseph G. Carson

Fed Chair Nominee Kevin Warsh intends to link the Fed's inflation target to median or "trimmed" price measures. These measures are a statistically manipulated version of reported inflation, creating an "alternative reality." They are the 2000s version of Arthur Burns' 1970s core inflation. If implemented, this would be the fourth time inflation measures used for policy have been dumbed down, primarily benefiting the finance sector, as it would create the impression of a lower underlying inflation rate, thus justifying low official rates.

Median and "trimmed" price measures remove the tails, or the items that record the highest and lowest price changes in a given period. These price measures are deceptive because they remove the extremes in the price distribution. During inflation cycles, the upper tail for items with significant price increases is much larger than the lower tail.

Median and "trimmed" price measures represent a more extreme version of former Fed Chair Arthur Burns' "core inflation," which excluded energy and food prices from the overall measure.

Government statisticians, with the help of Congress, have already removed the largest and most volatile core inflation items, house prices, mortgage and consumer loan interest rates, in the early 1980s and the late 1990s.

Under Greenspan's leadership, the Fed made another effort to dumb down inflation for policy purposes by selecting a hybrid price measure, the PCE deflator, as its preferred price target. The Fed never admitted that nearly one-third of the PCE price index is not derived from market prices or consumer-paid prices.

Choosing the PCE over the CPI was a convenient and potentially political method to produce a lower price index. This choice made it easier for the Fed to say it was achieving or close to its inflation target, thereby allowing it to maintain lower official rates than would otherwise be possible.

Price indexes are intended to accurately reflect the changes in the prices of the "conditions" they measure. However, government statisticians and Congress, with assistance from the Fed, continually alter these "conditions," not to enhance accuracy, but to create a lower index.

If Mr. Warsh is chosen to head the Fed, he is likely to succeed in adjusting the Fed's inflation target to these price indicators. The main beneficiary would be "finance," where Mr. Warsh previously worked, on and off, for the past 20 years.

The Fed advocates for its independence, yet how can it defend its "independence policy" when it implements or alters policies that mainly benefit industries where numerous members have worked or might work after leaving the Fed?

Fed Chair Nominee Warsh & The Dumbing-Down of Inflation

Viewpoints: May 2026

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