Weekly Global Economic Update

Week of June 15, 2026

• US inflation continues to accelerate
• The European Central Bank has raised interest rates while the Fed is likely to wait and see
• US administration wants to sustain high tariffs
• Chinese exports surge while inflation remains tame

US inflation continues to accelerate

• Not surprisingly, inflation continued to accelerate in May in the United States, likely due to the sharp rise in oil prices. The US government reported that, in May, the consumer price index (CPI) was up 4.2% from a year earlier—the highest level since April 2023. In addition, it was up 0.5% from April to May. This followed monthly increases of 0.6% in April and 0.9% in March. This means that, in the last three months, the index has risen by 2%, or at an annualized rate of over 8%.

This mainly has to do with energy: The price of energy was up by 23.5% in May versus a year earlier and up 3.9% month on month. The price of gasoline was up 40.5% from a year earlier and up 7% from the previous month. When volatile food and energy prices are excluded, core prices were up 2.9% from a year earlier, and up 0.2% from the previous month. Thus, core inflation remains relatively contained. In fact, although core inflation has accelerated, it remains lower than in September 2025. 

There are some subcategories in the CPI report in which prices rose sharply, likely due to the impact of rising prices for oil and other commodities. For example, the price of jewelry was up 21.4% from a year earlier, possibly reflecting the sharp rise in the price of gold. The price of computer software was up by 14.5%, which may be related to the increase in the cost of producing semiconductors. Airline fares were up 26.7%, likely reflecting the higher price of oil. The price of delivery services was up 16%, possibly due to the rise in the price of gasoline. And the price of coffee was up 17.5%, possibly due to the surge in the cost of shipping goods internationally. Prices of some food categories were up sharply. Moreover, with fertilizer prices already up, food prices are likely to accelerate further later this year.

Going forward, the rate of inflation will be affected by changes in the prices of oil and other commodities. If oil prices rise further, inflation will likely also accelerate. Inflation will also be affected by expectations about inflation: If workers expect higher inflation, they will seek bigger wage increases, which, in turn, could boost the actual rate of inflation. Setting expectations is the job of the US Federal Reserve, both through actual policy as well as through its communications. Plus, if the price of oil remains elevated or accelerates over time, it could feed into non-energy prices, thereby causing a further boost to core inflation. 

As for the US Fed, it will meet soon to decide policy. Futures markets show an implied probability of 96.2% that the Fed will leave the benchmark interest rate unchanged this month. This makes sense, given there is a new Fed chair and the committee members probably want to see more data before deciding if the current surge in inflation is temporary or likely to be prolonged. Meanwhile, futures markets show a two-thirds probability of a rate hike before the end of this year and a one-fourth chance of two or more hikes this year. Thus, investors seem to be expecting the Fed to tighten monetary policy, both to fight inflation and to convince the public that it intends to focus on fighting inflation.

Following the release of the inflation report, investors reacted to both the data and the news of the United States and Iran trading military attacks. US equity prices fell sharply, but the price of oil increased modestly and so did bond yields.

The European Central Bank has raised interest rates while the Fed is likely to wait and see

• In both the United States and the eurozone, inflation has risen sharply in the months since the start of the conflict in the Middle East. This has contributed to a shift in expectations for monetary policy on both sides of the Atlantic. Earlier this week, the ECB chose to raise its benchmark interest rates by 25 basis points—a decision taken unanimously by the policy committee. It was the first such increase since 2023. Next week, the policy committee of the Federal Reserve will meet to decide on monetary policy, for the first time under the leadership of Chair Kevin Warsh, and it is widely expected that the Fed will leave its benchmark interest rate unchanged. 

Why the difference? One possible explanation is that Europe has not only had to contend with a sharp rise in oil prices, but also with an increase in the price of natural gas due to disruption of the Strait of Hormuz—something that has not happened in the United States. As such, Europe appears to be somewhat more vulnerable than the United States to inflationary pressure stemming from the Middle East crisis. Plus, in the eurozone, following a period of monetary policy loosening, one can reasonably argue that the stance of monetary policy is accommodative, thereby promoting growth. Meanwhile, US monetary policy, which currently involves significantly higher interest rates than Europe, is seen as either neutral or modestly tight. Thus, the ECB probably needs to raise rates to avoid overstimulating an economy that is now vulnerable to inflationary pressures.

In any event, the ECB decision was not unexpected. ECB President Christine Lagarde justified the decision by saying that “we are beginning to see a broadening of inflation throughout the economy.” She added that “it is pretty obvious that we have to make a decision, that it is a sensible monetary policy decision. So, I don’t need to characterize it as credibility, insurance, or anything else, for that matter.” In other words, the decision appears to be based on actual monetary conditions rather than a need to build credibility with the investment community.

Also, the ECB left room for further tightening of monetary policy: Bundesbank President Joachim Nagel, a member of the ECB policy committee, said that “we are keeping all our options open and are ready to respond once again, should we have to.” He said that the energy price shock from the Middle East conflict was “strong and persistent,” suggesting that the inflationary impact is not simply transitory.

As for the US Federal Reserve, investors now see a very high probability that it will leave the benchmark interest rate unchanged next week. There is much discussion about what Kevin Warsh hopes to accomplish at his first meeting as chair. For much of his career, Warsh was generally considered a hawk—focused on inflation rather than employment, and on convincing investors of determination to minimize inflation.

As such, minutes of past Fed deliberations reveal that, when he served on the board, he opposed Chairman Bernanke’s policy of quantitative easing during the global financial crisis, although he voted publicly to support the policy. Internally, he argued that it risked boosting inflation.

On the other hand, in the year prior to the Middle East conflict, Warsh argued that the Federal Reserve needed to cut the benchmark interest rate even though inflation remained above its 2% target. He argued that impending productivity gains from artificial intelligence would suppress inflationary pressures, thereby allowing for more aggressive monetary policy.

Warsh will likely want to convince investors that he is in charge—that he controls the US Fed’s narrative. Thus, the interest-rate decision is not the most important thing. Rather, the most important thing will be how he communicates his vision to the investment community. That is what we’re waiting to hear.

Meanwhile, the price of oil came down after President Trump called off a threatened attack on Iran and said that the conflict is over. The reduced price in the past few weeks has already led to a modest rebound in an index of US consumer confidence. The future trajectory of inflation in the United States, Europe, and elsewhere will depend, in part, on what happens with oil prices. The ECB view appears to be that, regardless of what happens with oil, higher inflation is already baked into the system, and that it requires an offsetting tightening of monetary policy. The Fed’s view seems to be that the situation requires a wait-and-see approach.

US administration wants to sustain high tariffs

• The US administration spent much of 2025 attempting to build a new trading regime involving historically high tariffs and the threat of imposing tariffs. Yet, in 2026, it faced setbacks from court decisions about the legality of certain tariffs. Yet, the administration has not given up, and is clearly determined to maintain a high-tariff trading environment. As such, it recently inaugurated an investigation of 60 countries, with the goal of imposing tariffs ranging from 10% to 12.5% on their exports to the United States. The investigation will determine if these 60 countries are allowing imports of products made by forced labor.

Among the 60 countries is the European Union, thus setting the stage for a potential renewal of their trade conflict with the United States. The United States and European Union reached a trade agreement last year, which was ultimately approved by the European Parliament. Thus, the new action raises questions about the US commitment to the previous deal.

Meanwhile, the United States will also launch an investigation about subsidies and overcapacity in numerous countries, also setting the stage for a revocation of deals that were reached last year, likely including the one with China.

All of the new investigations are being undertaken on the basis of existing laws. These laws require time to conduct investigations, seek public comment, and rule on findings. Thus, the tariffs won’t be initiated immediately. However, if these investigations result in new tariffs, it is likely that they will be challenged in court. Plaintiffs will likely argue that the investigations were undertaken with the intention of imposing tariffs, rather than determining if laws have been broken. If so, courts might rule that the administration’s actions were arbitrary and not consistent with the way the law was intended to operate. As such, US trade policy remains uncertain.

Chinese exports surge while inflation remains tame

• Lately, the Chinese economy has grown predominantly due to strong exports. In May, that trend continued. Exports (denominated in US dollars) were up 19.6% from a year earlier—the second biggest increase since January 2022. The biggest increase since 2022 took place between January and February 2026, when exports were up 39.6% from a year earlier.

The strength of exports was likely supported by strong demand for AI-related products such as semiconductors and computer hardware. Indeed, exports of semiconductors were up 110% from a year earlier, while exports of mobile phones were up 44% and exports of automatic data-processing machines were up 66%. The last category includes inputs used in computers and data-storage equipment. In addition, this strength in exports was likely driven by the building up of inventories in anticipation of further disruptions to global supply chains due to the Middle East conflict. This is similar to what is happening in other countries.

Perhaps most notable was the big increase in exports to the United States. This follows many months in which exports to the country were down sharply. In part, the increase reflects the base effect of very low exports one year ago. Recall that, at that time, the United States imposed a very high tariff on imports from China, which had a significant dampening effect on trade. Consequently, in May, exports to the United States were up 35.4% from a year earlier. 

Also, exports were up 42.1% to South Korea, up 32.2% to Taiwan, up 24.3% to Southeast Asia, up 26.4% to Russia, and up 10.9% to Japan. In addition, exports were up by a more modest 7.6% to the European Union. While technology drove the big increase in exports, other products performed more modestly. Indeed, exports of refined-oil products were down 12%, while steel exports were down 8.1%.

Meanwhile, imports were up 27.4% in May from a year earlier. In three of the last four months, imports were up more than 25% from a year earlier. Thus, imports are growing rapidly, at a pace not seen since 2021. The strength of imports was partly due to the base effect of low imports a year ago. However, it also reflected the strong demand for technology inputs, many of which are used in products exported from China. For example, imports of automatic data-processing equipment were up 65.1% from a year earlier, while imports of circuits were up 52.1%. There were big increases in imports of unwrought copper (26.1%), copper ore (36.7%), and rare earths (40.6%), as well. Recall that China is the world’s leading location for the refining of rare earths. Imports were up 84% from South Korea, but also increased strongly from other Asian countries, especially from Southeast Asian economies.

Despite strong growth in exports, China faces headwinds in the form of potential restrictive policies by several trading partners, not only the United States. The European Union is increasingly focused on adjusting its trading relationship with China, having accused China of providing subsidies for exports. 

• In China, producer prices consistently fell from October 2022 until February of this year.  In part, this reflected excess capacity and in part an overall disinflationary or deflationary environment. That has changed significantly. Since March, producer prices have been rising. In May, prices were up 3.9% from a year earlier—the highest level since July 2022 and up from 2.8% in April.

The acceleration in producer prices appears to be closely related to the surge in the prices of oil, gas, and other commodities. It has had a significant impact on the prices of industrial products. Material costs were up 5.2% in May versus a year earlier, while prices of mining products were up 15.8% and prices of raw materials were up 9.2%. On the other hand, producer prices of consumer products continued to decline. Prices of consumer goods were down 0.8% while producer prices of food were down 1.8% and producer prices of clothing were down 1%.

Meanwhile, in China, consumer price inflation remained relatively contained in May.  Prices were up 1.2% from a year earlier—the same as April and lower than February. In the last four months, consumer prices have risen by 1% or more from a year earlier.  Prior to this period, the last time consumer prices were up 1% was in February 2023.  Thus, it appears that consumer price inflation has accelerated significantly, even though the level of inflation remains low.

Yet the acceleration began before the Middle East conflict. However, the sharp increase in February was mainly due to the base effect of sharply declining prices a year earlier. Thus, the February data was an outlier. The sharp rise in consumer prices between March and May, however, was likely related to the conflict. The continuing modest level of inflation is likely related to weak domestic demand and excess capacity.

Meanwhile, inflation is far lower in China than in most other major economies. It is not nearly at a level that would necessitate a tightening of monetary policy. Consequently, there is little indication that the People’s Bank of China will raise interest rates. This puts China in a favorable position relative to other leading countries where it is widely expected that monetary policy will soon be tightened. This rising gap between borrowing costs in China and elsewhere could place downward pressure on the value of the renminbi, possibly compelling Chinese authorities to intervene in currency markets to stabilize its value.

Week of June 08, 2026

• The US job market appears strong
• Global manufacturing industry strengthens amid Middle East crisis
• Subsidies are growing and could be driving trade patterns

The US job market appears strong

• Despite various headwinds, the US job market is showing signs of strength: The government reported that, in May, job growth was strong, while the unemployment rate remained steady and low. The number of job openings also increased in April. On the other hand, the number of initial claims for unemployment insurance also rose last week. Plus, the number of new hires fell in April. Strong growth in the number of jobs created was heavily concentrated in only a handful of industries.

Thus, the underlying picture of the job market remains somewhat mixed. And, along with data on inflation, jobs data will likely play a big role in the deliberations of the US Federal Reserve when it meets next time under the guidance of a new chair. Let’s look at the details:

The US government produces a monthly report on the job market, based on two surveys—a survey of establishments, and a survey of households. The establishment survey, released late last week, reported that 172,000 new jobs had been created in May. Moreover, the data for March and April were upwardly revised. Thus, in the last three months, 565,000 new jobs were created in total. In the prior three months, on the other hand, a loss of 13,000 jobs had been reported.

Why is job growth accelerating at a time when organizations face potentially negative consequences from the conflict in the Middle East? One possible reason is that hiring is taking place in the types of organizations that are less likely to be affected by the Middle East situation.

Of the 172,000 jobs created in May, 52,000 were in government, while 55,000 jobs were added in local government. In addition, 47,200 jobs were created in health care and social assistance. Plus, 70,000 were created in leisure and hospitality. If these three categories are excluded, however, then only 2,800 new jobs were created in May. There was a loss of 22,000 jobs in financial services, a loss of 2,000 jobs in information technology, and only 6,000 new jobs in professional and business services. Some of these industries are likely using artificial intelligence and other productivity-enhancing tools that could be moderating hiring.

Also, the establishment survey found that average hourly earnings for all workers were up 3.4% in May versus a year earlier—barely keeping pace with inflation. The acceleration in inflation due to the rise in oil prices may be putting some pressure on the purchasing power of American workers. In addition, the separate survey of households—which includes data on self-employment—found that, in May, employment grew slightly faster than the labor force, although the participation rate and the unemployment rate both remained unchanged.

Overall, the jobs report was mixed, with a strong rebound in payroll employment but a concentration of growth in only a handful of industries. Still, many investors interpreted the data as demonstrating economic strength. This led to higher expectations for a tightening of monetary policy. Indeed, the futures market’s implied probability that the US Fed will raise rates this year went from 42.5% before the jobs report release to 70% right after. Consequently, equity prices fell and bond yields rose.

Indeed, equities were down sharply, especially for tech companies that had helped drive the market higher. Some large tech companies that had previously funded their AI investments through cash flows have indicated that they may need to go to the capital markets. If borrowing costs rise due to a tightening of monetary policy, this could raise questions about the amount of cash these companies will have to generate to service their debts.

Meanwhile, there are other data points regarding the US job market that are worth considering. Earlier this week, the US government released its Job Openings and Labor Turnover Survey for April. It found that, in April, the number of job openings increased sharply from the previous month; the job openings rate increased to its highest level since November 2024. This is a sign of a strong job market. On the other hand, the hiring rate fell to the second-lowest level since April 2020, which was at the start of the pandemic. It is hard to interpret this as the two data sets appear to be in conflict with one another.

In addition, the government released data on initial claims for unemployment insurance. And it found that, last week, the number of initial claims was 225,000—the highest since early February. The four-week moving average was 214,750—also the highest since February. As such, this may indicate an increase in job separations.

Thus, the underlying picture of the US job market is somewhat difficult to discern. There are indications of both strength and weakness. Going forward, the big unknown is the duration and intensity of the conflict in the Middle East. The price of oil is uncertain and can easily move in either direction. If the Strait of Hormuz is reopened soon, the price of oil will likely gradually decline, thereby providing relief to inflationary pressures and likely leading to an easier monetary policy path than otherwise. Such a scenario would allow for a relatively healthy job market.

If, on the other hand, the strait remains closed for the next several months, the price of oil will likely rise sharply, thereby adding to inflation and expectations of inflation—potentially leading to much tighter monetary policy. Moreover, much higher inflation would likely weigh on consumers’ purchasing power, thereby slowing economic growth. Under that scenario, US employment growth would probably moderate and could slow significantly.

Global manufacturing industry strengthens amid Middle East crisis

• The global manufacturing industry is showing signs of considerable strength for two main reasons: The first and most important reason is that many manufacturers are boosting production and accumulating inventories now in anticipation of higher input prices and supply-chain disruption in the future. This likely reflects concerns about the potential duration of the conflict in the Middle East.

The second reason is that, in some countries, the rollout of AI-related data centers is supporting production of IT products. This includes the United States and much of East Asia.

These insights are gleaned from the latest purchasing managers’ indices (PMIs), published by S&P Global. PMIs are forward-looking indicators meant to signal the direction of activity in the manufacturing industry, and are based on subindices such as output, new orders, export orders, employment, input and output pricing, inventories, and sentiment. A reading above 50 indicates growth; the higher the number, the faster the growth.

The global PMI for manufacturing was 52.6 in May, unchanged from April, and the highest since mid-2022. This number indicates moderate growth of activity. Notably, there was a sharp increase in the PMIs for capital and intermediate goods. However, there was a sharp decline in the PMI for consumer goods. The latter probably reflects softer consumer demand in the face of higher energy prices. Meanwhile, the subindex for inventories shot up to a seven-month high as companies engaged in precautionary production and therefore accumulated inventories.

Of the 25 countries included in this month’s global PMI, the highest PMIs were in Taiwan, Netherlands, United States, India, South Korea, and Japan, in that order. What these countries appear to have in common, among other things, is strong participation in AI-related supply chains. The lowest PMIs were in Russia, Kazakhstan, Brazil, Myanmar, Poland, and Mexico, in that order. Let’s take a look at the details for some of the major economies:

In the United States, the manufacturing PMI increased from 54.5 in April to 55.1 in May—the highest level since May 2022. The high level was largely due to strong output growth, for which the subindex hit the highest level since April 2022. S&P Global commented that, “at first glance, the manufacturing sector seems to be firing on all cylinders, but lift the hood and the picture is not so clear.” It added that, since the crisis in the Middle East, “we have seen production and demand buoyed by stock building as companies worry over rising prices and supply difficulties.” This “makes it hard to take an accurate reading on the underlying health of the manufacturing economy, as growth will cool once this stock build has run its course.” Finally, S&P Global noted that supply-chain delays are now at their highest level since 2022.

In the eurozone, on the other hand, the PMI data indicates weakness due to rising prices. With the exception of the Netherlands, the eurozone is not being boosted by AI-related investment. The eurozone PMI for manufacturing fell from 52.2 in April to 51.6 in May, indicating modest growth in activity. The PMIs in May were 50.1 in Germany, 49.7 in France, 52.9 in Italy, 51.2 in Spain, and 55.9 in the Netherlands. The Dutch figure is the highest in four years and reflects hoarding of key inputs as well as strong new orders. S&P Global commented that, in the eurozone, the manufacturing “sector is showing signs of struggling under the weight of rising prices and supply disruptions emanating from the war in the Middle East.” And, as in the United States, supply-chain disruption is at the highest level since 2022.

The manufacturing PMI for the United Kingdom hit a four-year high of 53.9 in May as production accelerated. Interestingly, however, business sentiment improved markedly. Still, the boost to output was heavily related to front-loading due to the crisis in the Middle East. As such, S&P Global raised questions about the sustainability of the upturn.

Meanwhile, several Asian economies saw strong manufacturing PMIs for May, partly due to the strength of the AI supply chain. The PMI was more modest in China, however. In China, for the sixth consecutive month, the manufacturing PMI was in growth territory. In May, the PMI was 51.8—a level indicating modest growth. This was down slightly from April. S&P Global said that “the easing of inflationary pressures provided some relief to firms’ cost and pricing environments. However, the continued moderation in demand growth and the softening of external orders are key risks warranting attention.”

In Taiwan, on the other hand, the PMI stood at 56.1—the highest in five years and the highest in the world. Both output and new orders were unusually high. While this strength was likely related to AI, it also appears to reflect front-loading. S&P Global said that “much of this growth stems from stockpiling activities by both manufacturers and their clients, as they looked to safeguard against any future product shortages and price rises” due to the Middle East crisis. It also suggested that “the current momentum could soon fade once inventories are replenished.” It noted that “conditions could weaken in the months ahead as global inflationary pressures persist, and customer budgets come under greater strain.”

South Korea also had a high manufacturing PMI at 54.8—the highest in five years. S&P Global commented that “both new orders and production growth hit the highest for around five years, but anecdotal evidence from respondents often linked expansions to stock-building efforts.”

Japan also benefitted from front-loading. Its manufacturing PMI, at 55.1, was the highest in more than four years. S&P Global said that “the current period of expansion is being partly driven by stock building among manufacturers and their clients, as companies looked to safeguard against product shortages and mitigate price risks.” It concluded that, while “manufacturers generally anticipate reaping further gains from strong growth in areas such as AI and electronics, surging costs, and subdued global economic conditions could act as headwinds."

Subsidies are growing and could be driving trade patterns

• The gradual process of trade liberalization during the postwar era, which appears to have largely stalled last year, involved not only reductions in tariffs, but also the reduction or elimination of other nontariff barriers to trade. One important barrier to a competitive market is the existence of government subsidies. One of the tenets of the World Trade Organization (WTO) is that governments should not subsidize exports. Doing so creates an unfair advantage to subsidized products, thereby harming the competitiveness of products that might be cheaper or better—thereby creating an uneven playing field. In fact, the WTO has a process for addressing countries that engage in subsidization. Unfortunately, that process has been dormant for the past decade as the adjudicating body of the WTO is no longer operational.

Meanwhile, the Organisation for Economic Co-operation and Development (OECD) has conducted a study of subsidies in the global economy, based on data from 545 companies in 15 major industrial sectors globally. The OECD found that industrial subsidies are at their second-highest level since the global financial crisis, with subsidies accounting for 1.3% of firms’ sales and totaling US$108 billion in 2024.

Moreover, the OECD estimates that 52% of global subsidies went to Chinese companies. That is, based on the OECD’s methodology, Chinese companies received more subsidies than companies in all other countries combined. China, however, denies that its companies receive subsidies. It argues that its export prowess stems from the strong competitiveness of its products. Plus, it says that critics ignore the implicit subsidies that Western services companies enjoy.

Still, based on its database, the OECD says that Chinese companies enjoy government support that is three to eight times greater than companies within the OECD. In addition, Chinese companies enjoy more support than companies in other emerging markets such as India, Brazil, and Indonesia. Among the industries that receive relatively more subsidies than others are solar photovoltaic panels, semiconductors, aluminum, steel, and shipbuilding. In addition, the study found that Chinese automotive companies’ subsidies as a share of revenue are four times greater than those of OECD companies. Also, the OECD found that state-run companies (where the government owns more than 25% of equity) tend to receive far more subsidies than private sector companies.

Often, Chinese subsidies come in the form of below-market borrowing costs. In fact, the OECD found that Chinese companies with poor credit ratings are able to borrow from state-run banks at interest rates far below those available to creditworthy companies in OECD countries. While this might help to boost exports, it might also have the effect of keeping less competitive companies in business when they might otherwise fail. In the long run, this can affect more competitive players and can discourage the kind of creative destruction that is emblematic of market-driven economies.

The OECD says that the existence of subsidies has significantly influenced patterns of trade. It says that 22% of global market share gains for firms from 2005 to 2023 were due to subsidies. However, it says that, for Chinese companies, 60% of their market share gains were due to subsidies.

The OECD has no power to compel countries to reduce subsidies. It merely reports its findings. Yet, this study is important because it will likely provide support for countries that want to challenge China’s trade and industrial policies. The European Union in particular already intends to take steps to reduce China’s perceived threat to European companies. This study will likely embolden EU policymakers to implement restrictions on imports from China unless China takes steps to reduce subsidies and liberalize its markets.

The study suggests that China’s strong export performance may be partly related to government subsidies. For China, the strength of exports, which contributes greatly to its economic growth, may also present vulnerabilities. The Chinese economy has been shaped by a focus on investment and exports relative to domestic demand. Consumer spending as a share of GDP is relatively low, which can inhibit economic growth when exports do not perform well. If many countries, including the European Union, implement restrictions on imports from China due to perceived subsidies, China might face a serious challenge to its growth model.

Week of June 01, 2026

• Oil prices fall but risk of upward movement remains
• US inflation accelerates while real income declines
• Inflation accelerates in the eurozone, while the European Central Bank considers tightening monetary policy
• The European Union reacts to growing competition from China
• Artificial intelligence is boosting economic growth in East Asia

Oil prices fall but risk of upward movement remains

• The price of oil is now somewhat suppressed compared to a few weeks ago, likely due to optimism that a resolution of the Iran conflict could be imminent. At the time of writing, the price of Brent crude was US$91 per barrel, down from US$111 just a week ago. The price likely moved in response to news about the probability of a potential deal. Meanwhile, equity prices continue to perform well, with investors appearing unconcerned about risks from the blockade of the Strait of Hormuz. Moreover, if the strait is soon reopened, the price of oil will likely decline gradually, validating strong equity prices.

Yet, as I’ve previously noted, if the strait is not reopened soon, there is a significant chance that the price of oil will further increase in the coming weeks. This is not simply an economist’s rumination. The chief executive officer of a major energy company said that “the buffers and the shock absorbers are being steadily drawn down, and the ability for the market to absorb this imbalance is drastically diminished today versus where we started. Over the next few weeks, we’re likely to see those pressures flow through more directly to physical prices and there’s more upward pressure that I would expect as we get into June and certainly into July.”

Thus, there appears to be a gap between the reality of risk and investors’ perception of it. Indeed, even if a deal is reached soon, it will take a while before mines are cleared the strait and ships return to transit. There could be an intermediate period in which the oil shortage worsens, thereby pushing up prices, before normal distribution levels return. An executive at the state-run oil company in the United Arab Emirates said that, even if the conflict is resolved soon, “it will take at least four months to get back to 80% of pre-conflict flows, and full flows will not return before the first or even second quarter of 2027.”

If the price of oil remains relatively high, it would have negative implications for aggregate demand in the global economy. The energy company executive also noted that “if this goes on for long, it tips us into an economic slowdown or a recession […] you might have an offset on the demand side, which you can’t rule out.” In addition, once the crisis is over, it is likely that countries will purchase large amounts of crude to replenish reserves that will soon be exhausted. Those purchases will exert additional upward pressure on oil prices.

Meanwhile, with inflation elevated, real wages have stopped rising compared to a year ago in both the United States and the United Kingdom, while decelerating elsewhere. If the United States and Iran reach a deal soon, it will still take at least a month to clear mines from the Strait of Hormuz. Plus, it will then take time for the hundreds of ships stranded in the Persian Gulf to get to their intended destinations. Thus, the physical shortage of oil, which has been offset by the release of reserves, will continue and could get worse if reserves are exhausted. Thus, the price of oil will likely remain elevated, thereby contributing to further acceleration in inflation in many countries—at least for the next few months. And that means real wages will be suppressed, thereby contributing to slower economic growth in the coming months.

Also, early in the conflict, Iran destroyed much of the facility used to produce liquified natural gas in Qatar, which could take years to repair. Thus, natural gas prices in Europe and Asia could remain elevated for a prolonged period of time. In any event, a quick resolution of the conflict, even though it will mean continued disruption for a while, is anticipated to be the best-case scenario. If, however, the conflict is not resolved soon, it is possible that the price of oil will rise sharply, starting early- to mid-June.

US inflation accelerates while real income declines

• The US Federal Reserve’s preferred measure of consumer-price inflation was up sharply in April, but this was not driven entirely by rising oil prices. Core inflation, which excludes the impact of food and energy prices, was also up sharply, indicating that higher oil prices are working their way through the economy. The acceleration in inflation has contributed to a decline in real (inflation-adjusted) income. Yet, real consumer spending continues to rise, supported by a further decline in the personal saving rate. Let’s look at the data:

In April, real disposable personal income (income excluding the impact of taxes and inflation) was down 0.5% from the previous month. This was the third consecutive month in which real income declined. Moreover, in 7 of the last 12 months, real disposable income fell compared to month-ago levels. Consequently, it fell 1.1% in April from a year earlier.

Yet, consumer spending behaved differently: Real consumer spending was up 0.1% from March to April and was up 2.1% from a year earlier. In April, spending on durable goods was down sharply (down 0.5% from the previous month), while spending on nondurable goods and services increased. Spending on motor vehicles was down especially sharply. While spending on clothing also fell sharply, spending on gasoline was up. The disparity between income growth and spending growth was facilitated by a decline in the personal saving rate, which hit 2.6% in April—the lowest level since June 2022.

Inflation level hikes, first due to tariffs and then due to the crisis in the Middle East, have impacted household spending power. Yet, American households have been determined to maintain their standard of living by dipping into savings. This cannot go on indefinitely, however. Indeed, the sharp drop in spending on durables in April suggests that households are beginning to feel the pain.

Meanwhile, the Fed’s preferred measure of inflation—the personal consumption expenditure deflator—was up 3.8% in April versus a year earlier. This was the highest rate of inflation recorded since May 2023. Prices were up 0.4% from the previous month, down from an increase of 0.7% in March. When volatile food and energy prices are excluded, core prices were up 3.3% in April versus a year earlier—the highest rate since October 2023. Thus, it appears that rising oil prices are starting to feed their way into the prices of other goods and services.

Inflation is becoming embedded into the economy, thereby generating higher expectations for inflation. For the US Fed, the challenge will be to anchor those expectations, which may involve a tightening of monetary policy. If core prices did not reflect rising inflation levels, the Fed could theoretically look through the temporary surge in inflation and focus on the underlying trend. That would mean keeping interest rates unchanged. Yet, with core inflation now accelerating, this is probably not an option any more. Indeed, the futures market currently sees an implied probability of 44% that the Fed will raise the benchmark interest rate this year. While down from a week ago, this is up from zero one month ago.

Investor reaction to the latest inflation report was mixed: On the one hand, the deceleration of monthly inflation from 0.7% in March to 0.4% in April was good news; on the other hand, the acceleration in annual core inflation was seen as a potential problem. Bond yields and equity prices remain relatively unchanged as of time of writing. Meanwhile, oil prices were up due to concerns that a US-Iran deal is not imminent after all.

Inflation accelerates in the eurozone, while the European Central Bank considers tightening monetary policy

• Elevated oil and gas prices continue to cause an acceleration in inflation in Europe. In the eurozone, consumer prices were up 3% in April versus a year earlier—the highest rate of inflation since September 2023. Notably, prices were up 1% from March to April after having risen 1.3% in the previous month. The April figure was thus the second highest monthly inflation level recorded since October 2022.

The particularly high level of inflation was driven entirely to energy prices, which were up by 10.8% in April versus a year earlier. This was the highest energy inflation level seen in the eurozone since February 2023. Energy prices were up 3% from the previous month. On the other hand, food-price inflation has receded. When volatile food and energy prices are excluded, core prices were up only 2.2% in April versus a year earlier—the lowest rate since January. Thus, oil-price inflation has not yet fed its way through the economy in the way that we’ve seen in the United States.

By country, in April, annual inflation was 2.9% in Germany, 2.5% in France, 2.8% in Italy, 3.5% in Spain, 2.5% in the Netherlands, 4.2% in Belgium, 4.6% in Greece, and 3.3% in Portugal. Outside of the eurozone but within the European Union, prices were up 3.4% in Poland, 2.1% in Czechia, 2.6% in Hungary, 3.4% in Norway, 6% in Bulgaria, and 9.5% in Romania.

In the months to come, inflation is likely to accelerate further in the eurozone as the full impact of higher oil prices is felt. This will likely be true even if oil prices rise no further. If oil prices rise further, then inflation will accelerate even faster. For the European Central Bank, this will likely validate the highly expected decision to boost interest rates more than once in the coming year. Even though core inflation remains tame, some ECB leaders expect inflation to become embedded in consumer expectations and behaviors, thereby necessitating monetary tightening to anchor expectations.

Meanwhile, two leading officials from the ECB suggested that an interest-rate hike is very likely. Philip Lane, chief economist at the ECB, said that the “most benign scenario,” in which the conflict ends quickly and oil prices recede, is becoming “less likely.” As such, an ECB response in which it sees the increase in oil prices as temporary and not very impactful is no longer likely. Rather, an interest-rate hike will likely be needed to anchor inflation expectations. Indeed, Lane said that the ECB will likely increase its inflation forecast.

Separately, Isabel Shnabel, board member at the ECB, said that the benign scenario is no longer viable. She said that “a rate hike in June will be needed.” With consumer-price inflation hitting 3% in April, Schabel now expects it to hit 4% by the end of the year. If true, that would warrant several rate hikes.

Also, Lane said that the situation in the Middle East, in addition to boosting inflation, will likely lead to a worsening of the economic situation in the eurozone. He said that “there are several factors related to the Iran war that show that the macroeconomic outlook has gotten worse."

The European Union reacts to growing competition from China

• In Europe, there is growing concern about the impact of what is being called “China 2.0.” China’s shift from being a purveyor of low-priced labor-intensive goods to becoming a purveyor of leading-edge technologies in key industries has created a new competitive challenge for countries at the receiving end of Chinese exports. China 2.0 is an export powerhouse of goods for which previously Europe was a dominant player. These include automobiles and capital goods. Moreover, there is a perception in Europe that China can do this, in part, due to government subsidies (China denies this).

The result of this concern is that the European Union is now discussing measures meant to protect Europe from excessive disruption from China. Specifically, the European Union will utilize import quotas and tariffs to protect key industries from what was described as an “existential” threat. The industries being considered include chemicals, metals, and clean energy. The EU Industry Commissioner said that “we will use safeguard clauses in a more general manner on sectors and not just on businesses or particular raw materials.” He said that a process will be used that avoids long investigations and reviews, thereby allowing quick action when an industry is under imminent threat. He added that “our objective is not to break with China but to have a real rebalancing and real measures that allow us to do it.”

For China, this EU decision creates a new challenge: China has seen a sharp decline in exports to the United States due to tariffs. It has compensated by boosting exports elsewhere, including to the European Union. If the EU action leads to a sizable decline in Chinese exports to Europe, it could hamper Chinese growth. For China, it will be important to revitalize domestic demand as a source of growth, especially given the growing resistance to trade in many places. Also, it is worth noting that China continues to export low-end products as well, which is a source of concern for many lesser-developed nations that want to grow through exports of labor-intensive products.

Artificial intelligence is boosting economic growth in East Asia

• In the United States, the disruption from the conflict in the Middle East has been partly offset by strong AI investments. This has helped the US economy to keep growing at a favorable pace. Yet, this is true not only for the United States: It turns out that the economy of South Korea is experiencing a similar phenomenon. While South Korea has been hit by the Middle East disruption, its economy has also been boosted by participating in global supply chains related to AI.

The new governor of the Bank of Korea estimates that strong exports of AI-related chips will boost real economic growth by 0.7 percentage points in 2026—more than offsetting the negative impact of higher oil prices, which will reduce growth by 0.4 percentage points. Moreover, he estimated that the government’s supplementary budget, meant to help the economy to adjust to the oil-price disruption, will add 0.1 to 0.2 percentage points to the country’s gross domestic product.

The South Korean economy has been buttressed by strong exports of high-end chips used in AI tech. Such exports were up 139% in the first quarter of this year versus a year earlier. Meanwhile, other industries are struggling in the face of higher oil prices, including shipbuilding, steel, and petrochemicals.

• In Taiwan, the government expects the economy to grow 9.6% in 2026. This would be the highest growth rate recorded in 16 years. This stellar performance is mostly related to the massive growth of AI. Taiwan produces a very large share of the world’s most advanced chips, which are of crucial importance to AI. The economy already grew 8.8% in 2025—the highest in 15 years.

This strong growth is being fueled by exports, which are expected to grow 39.8% in 2026. Given that strong economic growth is not being fueled by domestic demand, the economy is not generating much inflationary pressure. This, in turn, implies that the central bank will probably leave the interest rate unchanged this year.