Producer Prices Surge as Inflation Pressures Build and Rate Expectations Shift

This week’s economic data includes: (1) Q1 2026 GDP (second estimate), (2) PCE (Personal Consumption Expenditure) price index, personal income, and personal spending for April, (3) weekly initial jobless and continuing claims, and (4) market trends across equities, oil and Treasury markets along with rate-cut expectations.

KEY SUMMARY:

Q1 2026 GDP was revised down to 1.6% due to weaker consumer spending and inventory-driven declines in private investment, though underlying private demand remained solid at 2.4%, highlighting a shift toward business-led growth supported by strong AI-related investment.

In the second estimate, GDP growth for Q1 2026 was revised down to a 1.6% annualized pace from 2.0%, reflecting softer consumer spending and weaker private investment, though the broader trend remains solid with the four-quarter average rising to 2.6%, the strongest since Q3 2024. Consumer activity cooled, particularly in services like healthcare, while private investment was reduced by a larger inventory drawdown, partially offset by continued strength in AI-related capital spending. Trade remained a notable drag, subtracting 1.25 percentage points from growth, driven in part by strong imports of AI-related technology components, including computers, equipment, and memory chips, while government spending was unchanged. Despite the softer headlines, underlying private demand held up at 2.4%, reinforcing the view that the economy remains resilient but increasingly reliant on business investment rather than consumer spending.

April data showed inflation still elevated but easing at the margin, while weakening income and falling savings are pressuring households—yet consumer spending remains resilient for now, supported by fuel-driven outlays, tax refunds, and increased reliance on credit, even as real spending momentum slows.

Inflation picked up in April but showed signs of moderating at the margin, with headline PCE rising 0.4% month over month, driven largely by higher gasoline prices tied to the Iran conflict and a one-time increase in housing costs. While goods inflation was supported by energy and AI-related durable demand, and services remained firm, core and supercore measures both slowed to 0.2% monthly gains. On a year-over-year basis, headline inflation accelerated to 3.8%, reflecting broad-based pressures, particularly from energy, while underlying inflation persisted.

Income trends weakened notably, with personal income flat and disposable income declining, driven in part by a sharp drop in farm-related payments and only modest gains in wages and interest income. Real disposable income continued to fall both month over month and year over year, highlighting ongoing pressure on household purchasing power. At the same time, the personal saving rate dropped to 2.6%—its lowest level since mid-2022—as consumers increasingly relied on savings, credit cards, and wealth effects from equity markets to sustain spending, even as delinquencies rose to their highest levels since 2011.

Despite these headwinds, consumer spending remained resilient, rising 0.5% in April, in part reflecting higher gasoline prices and steady services demand. Goods spending slowed from the prior month, while services growth held firm, with little evidence that higher fuel costs are crowding out other spending categories. However, real spending growth remained subdued at just 0.1% for the month and 2.1% year over year, underscoring the growing strain from inflation and signaling a potential slowdown in consumption momentum going forward.

Initial and continuing jobless claims edged upward to recent highs, but remain below year-ago levels, with the insured unemployment rate steady at 1.2%, signaling a stable labor market.

Initial jobless claims rose modestly to 215,000, their highest level since April but still well below year-ago levels, with the four-week average indicating a generally stable labor market despite geopolitical tensions and tech-sector layoffs. Continuing claims also increased to 1.786 million—the highest since early April—while the insured unemployment rate held steady at 1.2%. Overall, the data suggests a labor market that remains resilient.

Markets rallied on strong tech earnings and easing oil prices, while Treasury yields fell and rate expectations shifted to just one hike in early 2027, with investors now closely watching the upcoming May jobs report (expected 89K payrolls, 4.3% unemployment) as a key signal for Fed policy.

Equity markets continued their strong run, with the S&P 500 extending gains to a ninth consecutive week, supported by robust technology sector earnings and a broadening AI investment narrative beyond semiconductors into memory and the broader infrastructure stack. Major indices posted solid weekly and year-to-date gains, while sentiment was further lifted by declining oil prices amid optimism over a potential U.S.–Iran peace agreement.

Oil markets saw a sharp pullback, with crude prices recording their steepest weekly decline since mid-April, as expectations grew for easing supply disruptions tied to geopolitical tensions. Forward curves also moved lower, signaling anticipated price normalization, although gasoline prices—while modestly lower on the week—remain significantly elevated compared to pre-conflict levels, particularly in California.

In fixed income markets, Treasury yields declined across the curve amid lower oil prices and benign PCE inflation data, easing concerns about near-term rate hikes. The 10-year yield fell to 4.45% and the 30-year slipped below 5%, while rate expectations shifted meaningfully, with markets now pricing in just one additional 25-basis-point rate hike in early 2027 and no further tightening thereafter. Markets are now laser-focused on this Friday’s May employment report, which is expected to show 89,000 job gains and an unchanged unemployment rate of 4.3%, as it will likely be a key determinant of the Federal Reserve’s near-term policy path.

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DETAILED ANALYSIS:

Q1 2026 GDP – Second Estimate:

GDP growth was revised lower in the second estimate, with the economy expanding at a 1.6% annualized pace, down from 2.0% in the advance estimate. The downward revision was driven primarily by weaker consumer spending and private investment. Notably, the four-quarter average rose to 2.6%, up from 2.0% in Q4, marking the strongest pace since Q3 2024.

Consumer spending was revised down from 1.6% to 1.4%, reducing its contribution to GDP growth from 1.08% to 0.95%. The downgrade was largely due to softer services spending, which slowed from 2.4% to 1.8%, with its contribution declining from 1.11% to 0.86%. Healthcare was a key driver of the revision, with growth sharply reduced from 4.5% to 0.6%, lowering its contribution from 0.51% to 0.07%.

Private investment was revised down from 8.7% to 7.0%, primarily reflecting a larger $25.7 billion drawdown in inventories following a $15.6 billion decline in the prior quarter. As a result, inventories’ contribution to GDP dropped from 0.40% to 0.08%. This was partially offset by continued strength in AI-related spending, with growth in computers and peripheral equipment revised up from 67.4% to 75.4%, increasing its contribution from 0.58% to 0.63%. Overall, private investment’s contribution to GDP was reduced from 1.48% to 1.19%.

On the trade side, exports were revised up slightly from 12.9% to 13.1%, while imports were revised down from 21.4% to 21.1%. As a result, net exports subtracted 1.25 percentage points from GDP growth, largely unchanged from the initial estimate of 1.30%. Government spending was unrevised, with its contribution remaining at 0.73%.

Excluding government spending, inventories, and trade, final sales to private domestic purchasers—a key measure of underlying demand—were revised slightly lower to 2.4% from 2.5%. Despite the modest downgrade, the data underscore a resilient private sector amid inflation pressures, geopolitical uncertainty, and continued softness in housing. Overall, growth is increasingly being driven by businesses rather than consumers, with AI-related investment continuing to do much of the heavy lifting.

PCE Price Index & Personal Income and Outlays – April Update: 

The Bureau of Economic Analysis (BEA) released its April report on the PCE price index, personal income, and personal spending:

PCE Price Index

The headline PCE price index rose 0.4% month over month in April, down from 0.7% in March and below market expectations of 0.5%. The increase was driven primarily by higher gasoline and motor fuel prices (+5.7%), linked to the Iran conflict, which contributed roughly 0.13 percentage points (32%) to the monthly gain, and higher housing costs (+0.5%), reflecting a one-time statistical catch-up in rent data that added about 0.08 percentage points (21%).

Within goods, durable prices increased 0.6%, led by gains in computer software and accessories (+5.0%) and personal computers and peripheral equipment (+0.9%), supported by ongoing AI-related investment. Nondurable goods prices rose 0.8%, driven mainly by higher energy prices (+5.5%) and a modest increase in grocery prices (+0.5%). Combined food and energy prices rose 1.7% in April, easing from a 3.7% surge in March.

Services prices increased 0.3% month over month, with notable gains in airfares (+2.1%), household utilities (+1.2%), hotels and motels (+2.8%), and video streaming and rental services (+2.1%). Shelter costs rose 0.5%, accelerating from 0.3% in March, largely due to the same one-time statistical adjustment in rent data.

On a year-over-year basis, headline PCE inflation rose to 3.8% in April from 3.5% in March, matching market expectations and marking the fastest pace since May 2023. The increase reflected higher goods prices (+4.4%), which accounted for about 36% of the annual gain, and services inflation (+3.5%), which contributed the remainder. Food prices increased 2.7% year over year, while energy prices surged 29.0%, pushing combined food and energy inflation up to 7.7% from 5.9% in March.

Core PCE inflation, which excludes food and energy and is the Federal Reserve’s preferred inflation measure, increased 0.2% month over month in April, down from 0.3% in March and below market expectations of 0.3%. On a year-over-year basis, core PCE rose to 3.3% from 3.2% in March, matching expectations and marking the highest level since November 2023.

Supercore PCE inflation, which excludes food, energy, and housing, also increased 0.2% month over month in April, down from 0.3% in March. On a year-over-year basis, supercore PCE rose to 3.3%, unchanged from the prior month, suggesting that underlying inflation pressures remain broad-based.

Personal Income and Saving

Personal income was flat month over month in April, down from a 0.5% increase in March and below market expectations of 0.4%. Total personal income edged down slightly by $19 million, driven primarily by a sharp decline in farm proprietors’ income (-$61.7 billion; -54.8%) related to reduced payments from the Farmer Bridge Assistance Program. This was largely offset by gains in private wages and salaries (+$32.4 billion; +0.2%) and higher personal interest income (+$10.1 billion; +0.5%). On a year-over-year basis, personal income rose 2.5%, slowing from 3.3% in March and continuing a gradual deceleration from late-2025 levels.

Disposable personal income declined 0.1% month over month in April, down from a 0.5% increase in March. On a year-over-year basis, disposable income rose 2.6%, compared to 3.5% in March, maintaining a downward trend from mid-2025.

Real disposable personal income, adjusted for inflation, fell 0.5% in April after a 0.2% decline in March, extending a contraction that began in February and highlighting continued pressure on household purchasing power despite a stable labor market. On a year-over-year basis, real disposable income declined 1.1%, compared to a 0.1% decline in March, marking the weakest reading since November 2022. The ongoing erosion in real income underscores a growing headwind for consumer spending as rising living costs continue to outpace income growth.

Personal saving declined further in April, falling to $611.7 billion from $745.6 billion in March. As a result, the personal saving rate dropped to 2.6%—the lowest level since June 2022—down a cumulative 1.7 percentage points over the past three months. This decline reflects consumer spending continuing to outpace income growth, alongside elevated inflation—particularly higher gasoline prices—forcing households, especially lower-income households, to draw down savings to maintain living standards.

For households with stock market exposure, the continued strength in equities—driven in part by AI-related momentum—has created a wealth effect that is supporting consumption, with some households spending a larger share of income and increasingly taking on debt. At the same time, consumers are relying more heavily on credit cards to finance spending.

According to the Federal Reserve Bank of New York, total credit card balances reached $1.25 trillion in the first quarter of 2026, up from $1.18 trillion a year earlier—marking the highest first-quarter balance since tracking began in 1999. Moreover, the share of credit card balances that are 90 days or more delinquent rose to 13.12%, the highest level since the first quarter of 2011. Persistently high interest rates, elevated inflation, and only moderate wage growth have contributed to the highest delinquency levels since the financial crisis.

Historically, the savings rate has fallen below 4% during several periods—most notably ahead of the dot-com bust, during 2005–2008 prior to the financial crisis, and again in 2022. A common thread across these periods was strong asset market performance, where the resulting wealth effect helped sustain consumption despite insufficient income growth—at least temporarily.

Personal Spending 

Personal spending increased 0.5% month over month in April, down from 1.0% in March and in line with market expectations. The gain was driven largely by a 6.7% rise in gasoline and motor fuel prices, which accounted for roughly 28% of the monthly increase. Excluding nondurable goods such as gasoline, spending on durable goods was flat, with gains in personal computers and peripheral equipment (+1.4%), software and accessories (+1.4%), and video and audio equipment (+1.1%) offset by a decline in new light truck purchases (-2.5%).

Overall goods spending rose 0.6% in April, slowing from 2.2% in March, and contributed approximately 0.20 percentage points to total spending growth. Services spending increased 0.4%, unchanged from the prior month, supported by higher outlays on road transportation (+1.1%), recreation (+1.4%), restaurants and bars (+0.6%), and hotels and motels (+2.0%). Despite higher gasoline prices, there is limited evidence that consumers are pulling back on other categories, with larger tax refunds likely providing a cushion—particularly for lower-income households—even as disposable income declined.

On a year-over-year basis, consumer spending rose 5.9% in April, up slightly from 5.7% in March and marking the strongest pace since January 2025. Adjusted for inflation, real consumer spending increased just 0.1% month over month, down from 0.3% in March, while year-over-year growth held at 2.1%, reflecting the ongoing drag of elevated inflation on real spending momentum.

Weekly Jobless Claims – Week Ending May 23:

The Labor Department reported that initial jobless claims rose by 5,000 to 215,000 for the week ending May 23, up from a revised 210,000 the prior week and above market expectations of 211,000. This marks the highest level since the week ending April 17, 2026, although claims remain meaningfully below year-ago levels for the fifteenth consecutive week. The four-week moving average increased by 6,250 to 209,000, consistent with a still-stable labor market despite geopolitical tensions and high-profile technology sector layoffs related to AI automation.

Continuing claims, which reflect the number of individuals receiving unemployment benefits, increased by 15,000 to 1.786 million for the week ending May 16, up from a revised 1.771 million and slightly above expectations of 1.784 million. This is the highest level since the week ending April 10, 2026, while the insured unemployment rate remained unchanged at 1.2%. The four-week moving average for continuing claims rose by 2,500 to 1.773 million, reinforcing the view of a labor market that remains stable.

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WEEKLY MARKET ANALYSIS:

Equity Market

Equity markets posted strong gains, with the S&P 500 extending its rally to a ninth consecutive week. The advance was driven largely by robust technology sector earnings, including an upbeat outlook from Dell Technologies, signaling that the AI earnings story is broadening beyond semiconductors into memory and the broader AI infrastructure stack. Markets were also supported by declining oil prices, reflecting optimism around a potential peace deal with Iran.

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: +2.39% (weekly) & +16.05% (YTD), closing at 26,973
• S&P 500: +1.43% (weekly) & +10.73% (YTD), ending at 7,580
• Dow Jones Industrial Average: +0.90% (weekly) & +6.18% (YTD), closing at 51,032
• Russell 2000: +1.75% (weekly) & +17.62% (YTD), ending at 2,919

Oil Market and Gasoline Price

For the week ending May 29, 2026, crude oil prices posted their steepest weekly decline since mid-April, driven largely by optimism surrounding a potential diplomatic resolution between the U.S. and Iran, which raised expectations of easing supply disruptions through the reopening of the Strait of Hormuz. Brent crude fell $11.49, or 11.10%, from $103.54 to $92.05 per barrel, while

West Texas Intermediate (WTI) declined $9.24, or 9.6%, from $96.60 to $87.36 per barrel.

In the futures market, December 2026 Brent crude is priced at $81.86 per barrel, down $6.42 (7.3%) from the May 22 settlement, while WTI stands at $78.29, down $3.14 (3.9%). December 2027 contracts show further modest declines, with Brent at $76.75 (down $0.98, or 1.3%) and WTI at $71.95 (down $0.57, or 0.8%). Forward curves suggest the market expects oil prices to gradually ease as geopolitical tensions subside, with both 2026 and 2027 year-end pricing moving lower week over week.

U.S. average gasoline prices, according to AAA, declined by $0.16 to $4.39 per gallon. However, since the onset of the Middle East conflict in late February 2026, gasoline prices remain up $1.41, or 47.2%, from $2.98 per gallon.

According to the Department of Energy, California’s average price for regular gasoline edged down $0.05, or 0.8%, to $5.91 per gallon for the week ending May 25. Despite the recent decline, prices remain $1.44, or 32.1%, above pre-conflict levels of $4.48 per gallon.

Treasury Market

Treasury yields declined across the curve, driven primarily by easing oil prices amid optimism around a potential 60-day ceasefire between the U.S. and Iran, as well as PCE inflation data that came in largely in line with or slightly below expectations, reducing concerns about rapid rate hikes.

The 10-year Treasury yield fell to 4.45%, while the 30-year yield declined to 4.99%, slipping just below the 5% threshold.

Key Treasury Yield Movements:

• 2-year yield: 3.98% (-0.15%)
• 5-year yield: 4.13% (-0.14%)
• 10-year yield: 4.45% (-0.11%)

Rate Cut Expectations

In the prior week, investors and traders had fully priced in a 25-bp rate hike in December, with the probability of an additional 25 bps increase gradually rising from 13% in January to 48% by June—still below a 50% likelihood. This week, expectations have shifted, with markets now pricing in a single 25 bps rate hike in March 2027 and no further hikes thereafter.

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NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

• 6/1 (Monday)
  • ISM Manufacturing Index for May
• 6/2 (Tuesday)
  • JOLTS Job Openings for April
• 6/3 (Wednesday)
  • ISM Services Index for May
• 6/4 (Thursday)
  • Challenger Job Cuts for May
  • Weekly Jobless Claims & Continuing Claims
  • Nonfarm Productivity & Unit Labor Costs for Q1 Final
• 6/5 (Friday)
  • Employment Situation for May

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For a visual representation of this week’s economic review, you can view or download the slide deck here:05.29.2026 CBC Weekly Economic Update Presentation Slides

Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

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All content available on this material is general in nature, not directed or tailored to any particular person, and is for informational purposes only. Any of its content is not offered as investment advice and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. The information contained herein reflects the opinions and projections of Commercial Bank of California (CBC) as of the date hereof, which are subject to change without notice at any time. CBC does not represent that any opinion or projection will be realized. The information contained herein has been obtained from sources considered reliable, but neither CBC nor any of its advisors, officers, directors, or affiliates represents that the information presented on this material is accurate, current, or complete, and such information is subject to change without notice.