On the Up and Up

Last week I wrote about an accelerating economy and the data that makes it difficult to see the Federal Reserve cutting interest rates this year. This week brought April’s Consumer Price Index (CPI) and Producer Price Index (PPI) readings, both of which came in hotter than expectations. As a surprise to absolutely no one, energy (peach in the chart) played a major part in pushing prices higher.

Starting with CPI, I’m focusing on the headline data because it includes food and energy prices, which are excluded from core measures due to their volatility. Fed officials don’t want to (and shouldn’t) make interest rate changes based on possibly short-lived movements in prices, but the average consumer still suffers from those fluctuations, so they’re important to watch.

Not too long ago, energy was acting as a deflationary force. But in April, it had the largest impact on CPI in years. Consumers, businesses, and policymakers expected the war in Iran to trigger at least a short-term surge in energy prices, but now that we’re in the thick of the increases, the clock is ticking on how long we can call it short-term. At some point, it will meaningfully hurt consumer demand and we won't be able to explain it away.

To set reasonable expectations about how inflation might change — and how high the headline number can go — we decided to look at the average impact oil shocks have had on CPI in the past.

The following chart looks at the 12 months after a surge in oil prices, showing the incremental moves in the headline number and several underlying components. Not surprisingly, energy rises the most, followed by used cars. Core goods in aggregate tend to see a steeper rise than the overall index, which is what pressures consumers and forces them to adjust their spending decisions.

Perhaps the most important takeaway from this research is that the average incremental move in headline CPI 12 months after an oil price shock is 1.5%.

Applying that to the current situation suggests that we will see a 3.9% headline inflation number at some point soon (because pre-war CPI was 2.4%). And April’s was 3.8%.

Again, the 1.5% is an average, not a ceiling, so some periods saw more than that and some saw less. Given the severity of this shock, it wouldn’t surprise me if the inflation impact was above-average.

Wholesale a Whole Lot Worse

Let’s move on to PPI, which measures wholesale inflation — or the prices domestic producers receive for their output. In other words, PPI is the inflation that can be seen before goods and services make it to the consumer level.

PPI also came in above expectations in April, but by a lot more than CPI. The consensus estimate was for 4.8% year-over-year, and the actual number came in at 6.0%. Digging deeper into the drivers, the increases in trade services (blue in the chart) and transportation and warehousing services (magenta) were some of the biggest hot spots. Trade services measure the margins/markups that wholesalers and retailers add to the cost of production — effectively what they charge for the “service” they provide as a retailer. Transportation and warehousing is more straightforward and was mostly affected by the surge in diesel fuel prices.

PPI doesn’t typically make as many headlines as CPI, but some argue it’s even more important because it has the power to foreshadow what could be coming in consumer prices. If wholesalers are increasing their markups and input costs are rising, chances are that will trickle through to CPI in coming months.

On the Fed, Again

While not surprising, these hot inflation prints raised expectations for a Fed interest rate hike in 2026. (They were up to 43% at one point, but are back down around 38% as I write this Wednesday). That still doesn’t suggest a full hike is priced in, but not too long ago we were talking about the probability of two or three cuts this year. These are big swings, and they’re happening at a critical time when a new Fed chair is about to take over.

Although the Fed doesn’t call me for my opinion, I don’t think they should or will hike rates this year. But that’s not the important part of this picture — the important part is that the volatility in rate expectations is going to upset markets in the meantime.

I don’t think this inflation scare is something to sound the economic alarm bells on yet, but it is likely to cool down growth prospects for at least some of 2026. Since the beginning of the oil supply shock, the market story has revolved around how long it would last and whether businesses and consumers would experience demand destruction due to increased inflation. That remains the story today, and is a question no one has an answer to.

SoFi can’t guarantee future financial performance, and past performance is no indication of future success. This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.

Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Thomas is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Form ADV 2A is available at www.sofi.com/legal/adv.