Viewpoints: June 2026

Iran’s closure of the Straits of Hormuz on March 2 has sent fuel costs spiraling upwards. The Fed’s preferred measure of inflation is of the price index for core personal consumption expenditures (PCE). These exclude consumers’ direct (or “final”) purchases of gasoline & other motor fuel. However, increases in the cost of fuel used to produce and transport core consumer goods & services may pass through to core prices. In a recent paper I present compelling empirical evidence that the pass-through of intermediate fuel costs to final core consumer prices is highly significant and could contribute as much as 0.8 extra percentage points to second-quarter annualized core inflation.

I began by constructing a price index for the intermediate consumption of the three major fuels: diesel fuel, gasoline, and jet fuel. In doing so I assumed the domestic consumption of diesel fuel and jet fuel is all intermediate while treating as intermediate the domestic consumption of gasoline not included in PCE. The average (since 1979) shares of the three fuels in intermediate use are: diesel fuel (62%), gasoline (25%), and jet fuel (14%), but recently those shares are 66%, 13% and 21%, respectively.

The U.S. financial headlines focus on high stock market valuations, questioning them as too high, the concentrations of capitalizations, questioning them as excessive, and big cap AI companies that are getting bigger and going public at higher capitalizations. Here’s a few economic observations on these trends and an international comparison.

The economy. The U.S. economy has been quite resilient to recent shocks—erratic tariffs policies and the surge in oil prices--and continues to expand. Economic growth has been driven by consumer spending and solid gains in business investment while residential investment has weakened and subtracted from growth. Currently, while the ongoing Middle East conflict and high oil prices and tariffs are weighing on consumer pocketbooks, and real disposable income has fallen in each of the last three months ((Feb-Mar-April), households have reduced their rates of personal saving to smooth real consumption. Nominal GDP, the broadest measure of current dollar spending and aggregate demand, has risen 6% in the last year and at a 5% annualized pace in the last two quarters. Sustained high energy prices are likely to adversely impact real consumption.

Real interest rates remain moderate, the economy and the probability of recession is low. Of note, history, at least going back to the 1950s, shows that the S&P500 continues to rise and does not peak until just before recession.

Profits. Corporate profits are rising briskly, much faster than GDP (Chart 1). That’s also typical during economic expansions. Operating profits have risen 18.7% in the last two years and are up 63.3% since 2019, just before Covid. During those same two periods, nominal GDP rose 10.8% and 47.7%, respectively.

Korean equities, alongside Japan, Taiwan and US technology stocks, were identified at the outset of the Iran conflict as some of the most compelling investment opportunities. All have outperformed the MSCI World Index, but Korea has emerged as the clear standout.

The story extends beyond the stock market. The economy has strengthened markedly, supported by both domestic and external demand. GDP growth accelerated from 1.6% year-on-year in 4Q25 to 3.4% in the first quarter of 2026, driven by robust consumption and non-residential investment spending. Exports have also rebounded strongly, leaving Korea firing on all cylinders (Figure 1).

With food and energy prices surging in recent months, you might think that households would be cutting back on their real spending on “discretionary” goods and services, i.e., total goods and services excluding purchases of food, energy, clothing, housing and healthcare. After all, households would have to use more of their income to purchase higher-priced food and energy goods and services, leaving less income for the purchases of more discretionary goods and services. However, real discretionary (as I have defined it) household spending in April 2026 was 53.9% of total real spending, the highest percentage registered since the data started being reported, January 1959.

Plotted in Chart 1 are the monthly observations of discretionary real personal consumption expenditures as a percent of total expenditures (the blue bars) along with monthly observations of the personal consumption chain price index for food and energy goods and services (the red line). Notice that in the last three months starting in February 2026, the food-energy price index started rising, as did relative real consumer spending on discretionary goods and services. Similarly, back in 2022, food and energy prices were rising after Russia’s unprovoked invasion of Ukraine and relative real consumer discretionary spending also rose for several months. What might explain this counterintuitive phenomenon?