Financial News Highlights

  • Kevin Warsh takes the helm of the Federal Reserve after his nomination was confirmed by the Senate this week.
  • Inflation spiked in April, with CPI up 3.8% year-on-year, as higher energy prices filtered through the economy.
  • This in turn weighed on retail sales during the month, with real sales down 0.2% month-on-month.

Changing of the Guard

 

Chart 1: The chart shows the year-on-year percentage change in total CPI, core CPI, PPI final demand, and PPI final demand excluding food, energy, & trade services. The data runs from January 2025 to April 2026. Over the past 18 months, all four metrics fluctuated around 3%, although CPI growth did ease during the second half of 2025. Now in 2026, all metrics are rising again, with total CPI near 4% in April and PPI final demand near 6%.

 

The changing of the guard at the Federal Reserve was formalized this week, as Kevin Warsh was confirmed by the Senate as Powell’s successor on Wednesday. This means Jerome Powell’s eight-year term as Chairman came to an end on Friday. Warsh takes the helm at a time when inflation pressures are rising sharply on the back of elevated global energy prices. Details on a potential resolution to the conflict in Iran remained elusive this week, which led to a 9% uptick in WTI oil prices. Equity markets were roughly unchanged on the week, with the S&P 500 rising 0.2%, as U.S. Treasury yields spiked by roughly 20 basis points, reflecting stronger inflation readings.

In terms of economic data releases, the inflation data for April was the biggest news item. Headline CPI hit a three-year high of 3.8% year-on-year (y/y), on the back of rising energy prices (Chart 1). Stripping out energy and food products, core CPI accelerated for a second consecutive month to 2.7% y/y, partly owing to the feedthrough of energy prices to categories like airline fares. Broad-based passthrough to non-energy categories was absent from the report, but with energy prices rising through early May, subsequent reports may be less benign, particularly if no resolution is reached over the near-term.

 

Chart 2: The chart shows the New York Federal Reserve Bank's global supply chain pressure index between January 2016 and April 2026. The series is measured in terms of standard deviations from the historical average. During the pre-pandemic period, the series fluctuated close to zero, but spiked to 3-4 standard deviations above average during the pandemic and its aftermath. The series trended back to zero by 2023/2024, and remained there until 2026 when the series spiked once again. In April 2026, the series hit nearly 2 standards deviations – the highest level of disruption since late 2022.

Upstream, the influence of higher energy prices was similarly evident for producers in April, with the Producer Price Index up 6% y/y. Selling price pressures have not been this elevated since late 2022, as global supply chain disruptions have begun to converge with those seen during the initial aftermath of the pandemic (Chart 2). The impacts of these developments on businesses, and the follow-through to consumers, will be monitored closely by the Federal Reserve.

To that end, the April retail sales report provided an early snapshot of consumer health. It showed a solid gain of 0.5% month-on-month in nominal terms, but after adjusting for inflation, sales fell 0.2%. This likely reflected, in part, the comparable contraction in real earnings during the month, which, if sustained, would continue to weigh on consumption going forward. A near-term resolution to the Iran conflict would help ease some of this pressure, although the effects would likely be gradual as supply disruptions take time to fully unwind. Taken together, these crosscurrents leave the near-term policy outlook highly dependent on incoming inflation data.

Against this backdrop, Fed officials in public remarks this week flagged concerns about the inflation reports. Several officials, including Chicago Fed President Goolsbee and Boston Fed President Collins, noted that tighter financial conditions may be required to quell emerging inflationary pressures. The balance of opinion among officials emphasized that a neutral stance would be appropriate over the near term to allow time to assess incoming data. As of the time of writing, financial market pricing for a rate hike by year-end has risen to 40%.

 

Andrew Foran, Economist | 416-350-8927

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