Services Inflation Remains Elevated as PPI Signals Persistent Price Pressures | Weekly Economic Review

This week’s economic data includes: (1) retail sales for February, (2) Job Openings and Labor Turnover Survey (JOLTS) for February, (3) job creation and employment

situation for March, (4) weekly initial jobless and continuing claims and (5) market trends across equities, oil and Treasury markets along with rate-cut expectations.

 

KEY SUMMARY:

Retail sales rose a strong 0.6% in February on broad‑based gains, signaling resilient consumer demand and a positive near‑term growth outlook, though higher energy prices from the Middle East conflict could partially temper momentum if pressures persist.

Retail sales rebounded solidly in February, rising 0.6% month over month and marking the strongest gain since July, while exceeding expectations for a 0.5% increase. The pickup followed a modest decline in January and reflected resilient consumer spending supported by larger tax refunds, real wage growth, and improved weather. Gains were broad‑based, led by motor vehicles and parts, health and personal care stores, and non-store retailers. On a year‑over‑year basis, retail sales accelerated to 3.7% from 3.2% in January, signaling continued momentum in consumer demand, though this strength is likely to be partially offset by higher prices stemming from the Middle East conflict.

 

At the category level, 10 of 13 retail categories posted gains, with notable strength in health and personal care, clothing and accessories, sporting goods, and autos. Department stores rebounded sharply, reversing January’s steep decline, while only furniture and food and beverage stores contracted. Core retail sales excluding autos and gasoline rose 0.4% and beat expectations, while the control group used in GDP calculations jumped 0.5%, the strongest increase since October. Together, these measures point to firm underlying consumer demand and a positive contribution to near‑term economic growth, assuming energy‑related pressures from the conflict remain temporary.

 

The February JOLTS data show a cooling labor market marked by declining job openings, hiring, and quits, modestly higher but still subdued layoffs, and easing wage pressures—reinforcing a “low hire, low fire” environment with limited inflation risk from labor.

The February JOLTS report showed continued cooling in labor demand, with job openings falling by 358,000 to 6.88 million, the lowest level since 2021 and below expectations. Declines were broad‑based across industries, regions, and firm sizes, led by accommodation and food services, manufacturing, and health care. The job openings rate dropped to 4.2%, and the ratio of openings to unemployed workers fell below 1.0 to 0.91, signaling excess labor supply. This shift suggests easing wage pressures and indicates the labor market is no longer a meaningful source of inflation risk.

 

Labor market flows also softened. Hiring declined sharply to 4.85 million—the lowest since April 2020—while the hiring rate fell to 3.1%, reflecting growing caution in headcount planning amid higher costs and geopolitical uncertainty. Although layoffs ticked up modestly, they remained low on both a historical and year‑over‑year basis, and quits fell to their lowest level since 2020, signaling reduced worker confidence in switching jobs. Overall, the data reinforce a “low hire, low fire” environment, characterized by subdued labor demand, limited layoffs, and easing wage pressures.

 

The March jobs report showed a solid rebound in hiring and a lower unemployment rate, signaling a stabilizing labor market, though easing participation, slowing wage growth, and geopolitical cost pressures point to emerging headwinds for consumers.

The March employment report showed a rebound in job growth and a modest decline in the unemployment rate, suggesting the U.S. labor market is stabilizing after earlier weakness, though it remains exposed to potential supply shocks from ongoing geopolitical tensions. Nonfarm payrolls increased by 178,000 jobs—the strongest gain since December 2024 and well above expectations—following a revised decline in February. Job growth was broad‑based and driven largely by health care, leisure and hospitality, and construction, supported by the resolution of strike activity and improved weather. Upward revisions to January payrolls partially offset downward revisions to February, while the three‑month average of job gains improved meaningfully.

 

Private sector employment led the rebound, rising by 186,000 jobs and reversing February’s decline, while government employment continued to contract for a sixth straight month. Health care, social assistance, and leisure and hospitality remained the primary engines of job creation, accounting for the vast majority of gains over the past year, while most other sectors continued to shed jobs. Construction hiring also strengthened, supported by demand tied to AI data center development and favorable weather. Looking ahead, leisure and hospitality hiring is expected to pick up further into early summer, aided by activity related to the 2026 World Cup.

 

Despite stronger job creation, underlying labor market dynamics point to some cooling. The unemployment rate declined to 4.3%, driven partly by lower layoffs, but the labor force and participation rate both fell, reflecting retirements, more marginally attached workers, and tighter immigration policies. Wage growth continued to slow, with average hourly earnings rising just 0.2% month over month and 3.5% year over year—the lowest pace since 2021—while average weekly hours edged down. Together, easing wage pressures, reduced hours worked, and geopolitically‑driven cost pressures suggest consumers may face growing headwinds even as employment conditions stabilize.

 

Weekly initial jobless claims fell to low levels, signaling limited layoffs, while continuing claims rose modestly but remained below year‑ago levels, indicating a stable labor market despite some workers taking longer to find new jobs.

Weekly initial jobless claims fell to 202,000 for the week ending March 28, well below expectations and remaining at historically low levels, signaling continued limited layoffs and a stable labor market, as confirmed by a declining four‑week moving average. While continuing claims rose modestly to 1.84 million and slightly exceeded expectations, they remain below year‑ago levels, and their four‑week average continued to trend lower—suggesting that although some unemployed workers are taking longer to find jobs, overall labor market conditions remain firm.

 

Equity markets rebounded sharply on optimism around a potential U.S.–Iran ceasefire and strong economic data, while oil and gasoline prices surged (up about $1.12 per gallon), Treasury yields eased modestly, and rate expectations remained unchanged with no cuts priced through 2027.

Equity markets staged a strong rebound during the Good Friday holiday‑shortened week, snapping a five‑week losing streak as equities rallied on optimism around potential progress toward a ceasefire between the U.S. and Iran, alongside stronger‑than‑expected manufacturing and retail data. Gains were broad across major indices, led by the Nasdaq, though year‑to‑date performance remains negative for most benchmarks except small caps, reflecting lingering uncertainty despite the near‑term relief rally.

 

Elsewhere, oil prices remained elevated amid concerns over potential disruptions through the Strait of Hormuz, with West Texas Intermediate crude oil (WTI) surging above Brent—a rare occurrence—driven by near‑term supply pressures and a backward-dated market structure. These dynamics have pushed U.S. gasoline prices sharply higher, with AAA data showing an increase of approximately $1.12 per gallon, rising from $2.98 to $4.10 since the conflict began. Treasury yields edged lower on reduced safe‑haven demand and month‑end rebalancing flows, though yields remain materially higher since the onset of the conflict, while rate expectations were little changed, with markets continuing to price in no rate cuts through 2026 and 2027.

 

***************************************************************************************************************

DETAILED ANALYSIS:

Retail Sales – February Update:

Overview:

According to the U.S. Census Bureau, retail sales increased 0.6% month over month in February, rebounding from January’s revised 0.1% decline (initially reported as -0.2%) and marking the strongest gain since July. The February increase exceeded market expectations for a 0.5% rise. Consumer spending proved resilient ahead of the ongoing conflict in the Middle East, supported by larger tax refunds, real wage growth, and improved weather conditions. That said, higher gasoline and other prices stemming from the war are likely to offset some of the anticipated boost to spending from tax refunds.

 

The February rebound was broad-based, with the largest contributions coming from motor vehicles and parts (+0.22%), health and personal care stores (+0.12%), and non-store retailers (+0.12%). On a year-over-year basis, retail sales rose 3.7% in February, accelerating from 3.2% in January.

 

Category Performance:

Of the 13 retail categories tracked, 10 posted gains in February, led by:

• Health & personal care stores: +2.3%
• Clothing & accessories: +2.0%
• Sporting goods: +1.3%
• Motor vehicles & parts: +1.2%
• Miscellaneous store retailers: +1.1%

 

Other categories showing growth included gasoline stations, non-store retailers, electronics & appliance stores, building material & supplies, and food services & drinking places.  Notably, department stores within the general merchandise category surged 3.0% in February, reversing January’s sharp 6.0% decline.

 

Conversely, 2 categories declined:

• Furniture & home furnishings stores: -1.0%
• Food & beverage stores: -1.0%

 

Food services & drinking places—a key gauge of household financial health and the only services component in the report—rose 0.4% in February, reversing January’s 0.2% decline.

 

Core Retails & Control Group:

Retail sales excluding autos and gasoline increased 0.4% month over month in February, up from a revised 0.2% gain in January and above expectations of 0.3%. On a year-over-year basis, these sales rose 4.1%.

 

The control group—which excludes food services, autos, building materials, and gasoline stations and is used in GDP calculations—jumped 0.5%, the strongest gain since October. This exceeded the 0.3% forecast and followed a revised 0.2% increase in January. On an annual basis, control group sales were up 3.8% in February.

 

JOLTS – February Update: 

The Bureau of Labor Statistics (BLS) reported that job openings declined by 358,000 in February to 6.88 million, down from 7.24 million in January (revised up from 6.95 million) and slightly below market expectations of 6.89 million. On a year-over-year basis, job openings fell by 360,000. The job openings rate—which measures labor demand as a percentage of total jobs (employment plus openings)—declined to 4.2% in February from 4.4% in January. Both the monthly and annual declines point to softening demand for workers.

 

The February decline was driven primarily by reductions in accommodation and food services

(-211,000), manufacturing (-71,000), and health care and social assistance (-51,000). By firm size, businesses with 1–9 employees experienced the largest drop in openings (-311,000), followed by firms with 50–249 employees (-84,000). All four regions reported declines.

 

The ratio of job openings to unemployed workers—a key metric closely watched by the Federal Reserve as a gauge of labor market balance—fell to 0.91 in February from 0.98 in January, indicating more unemployed workers than available jobs. This excess labor supply suggests wage pressures should remain subdued, implying the labor market is not currently a significant source of inflation pressure.

 

Hiring fell by 498,000 to 4.85 million in February, the lowest level since April 2020 (4.03 million). The decline was driven mainly by accommodation and food services (-178,000), professional and business services (-154,000), health care and social assistance (-103,000), and construction (-88,000). The hiring rate (hires as a percentage of employment) declined to 3.1% in February from 3.4% in January. Weakness in accommodation & food services and construction was likely exacerbated by severe winter weather during the month.

 

The three-month moving average for hiring stood at 5.16 million in February, remaining within the 5.2 to 5.3 million range observed over the past eight months, signaling that hiring activity remains subdued. The slowdown in both job openings and hiring suggests businesses are becoming more cautious with headcount planning. With geopolitical tensions expected to raise operating costs, labor demand and hiring are likely to remain soft.

 

Layoffs increased by 61,000 month-over-month to 1.72 million in February, coming in above January’s 1.66 million and slightly above market expectations of 1.67 million. The increase was driven largely by retail trade (+72,000) and information (+17,000). The layoffs rate edged up to 1.1% in February from 1.0% in January. The three‑month moving average stood at 1.68 million, slightly below the 1.7 to 1.8 million range seen in 2025, indicating layoffs remained subdued. On a year‑over‑year basis, layoffs declined by 146,000, or 7.8%.

 

Voluntary quits declined by 157,000 to 2.97 million in February, the lowest level since April 2020 and below expectations of 3.12 million. This followed January’s revised 3.13 million reading. Declines were concentrated in accommodation and food services (-119,000), wholesale trade

(-35,000), and professional and business services (-28,000). The quits rate fell to 1.9% in February from 2.0% in January. The three-month moving average edged down to 3.11 million from 3.16 million in January, remaining within the 3.0 to 3.1 million range of the past seven months. This suggests workers remain cautious about leaving their jobs in pursuit of higher wages.

 

Overall, the February JOLTS report highlights continued cooling in labor demand as businesses adjust workforce plans. While layoffs remain low, declines in openings, hiring, and quits reinforce a “low hire, low fire” labor market environment, helping to limit upward pressure on wages and inflation.

 

Job Creation and Employment Situation – March Update:

Overview

According to the Bureau of Labor Statistics (BLS), the U.S. labor market rebounded in March following weakness earlier in the year, while the unemployment rate declined. Together, these developments suggest the labor market is stabilizing, though it remains vulnerable to potential supply shocks stemming from the ongoing conflict in the Middle East.

 

Businesses created 178,000 jobs month over month in March, the strongest gain since December 2024 and well above market expectations of a 65,000 increase. This followed a revised decline of 133,000 jobs in February (revised down by 41,000 from -92,000). Job growth in March was driven primarily by gains in health care, leisure and hospitality, and construction, reflecting the resolution of the Kaiser Permanente strike in California and Hawaii as well as improved weather conditions. Job gains were broadly distributed across most industries.

 

In addition, January payroll gains were revised up by 34,000, from 126,000 to 160,000. Combined revisions to January and February payrolls lowered previously reported employment levels by a net 7,000. The three‑month moving average of job gains rose to 68,000 in March from just 3,000 in February, marking the highest level since April 2025.

 

Private and Government Employment

Private sector employment increased by 186,000 jobs in March, far exceeding expectations for a 78,000 gain and reversing a revised decline of 129,000 in February. Government employment declined by 8,000, following a 4,000 decline in February and marking the sixth consecutive month of contraction. Private sector gains were broad‑based, spanning both goods‑producing (+43,000) and private service‑providing industries.

 

Industry Breakdown

Service‑sector job gains were led by health care (+76,400), social assistance (+13,500), and leisure and hospitality (+44,000). The increase in health care employment reflected a rise of 35,000 jobs in physicians’ offices as workers returned following strike activity. Since the Liberation Day last April, health care has added 379,500 jobs—an average of 31,625 per month—making it the strongest job‑creating industry over that period. Social assistance added 301,000 jobs, or an average of 25,083 per month, ranking second, while leisure and hospitality added 176,000 jobs, averaging 14,667 per month and ranking third.

 

Within the goods‑producing sector, construction led gains with an increase of 26,000 jobs. Since last April, construction has added 57,000 jobs, making it the fourth‑strongest job‑creating industry over the period, driven in part by demand related to AI data center development. Improved weather conditions also supported gains in construction and leisure and hospitality during March.

 

Over the past 12 months, health care, social assistance, and leisure and hospitality have collectively added 856,500 jobs, serving as the primary engines of employment growth. In contrast, all other sectors combined shed 595,700 jobs over the same period. Leisure and hospitality hiring is expected to strengthen through June, supported by increased activity related to the 2026 World Cup.

 

Unemployment and Labor Force

The unemployment rate declined to 4.3% in March from 4.4% in February, below market expectations of 4.4%. The improvement reflected a decline of 332,000 unemployed individuals, down 4.4% month over month, driven primarily by lower layoffs. This occurred alongside a 396,000 decline in the labor force, or 0.23% month over month.

 

Participation and Duration

The labor force participation rate edged down to 61.9% in March from 62.0% in February, below expectations and the lowest level since November 2021. The decline was partly attributable to a 325,000 increase in individuals marginally attached to the labor force (including discouraged workers), as well as retirements tied to an aging population and the effects of tighter immigration policies.

 

Long‑term unemployment declined by 78,000 in March, with 1.82 million individuals unemployed for 27 weeks or more, down from 1.90 million in February. The average duration of unemployment decreased slightly to 25.3 weeks from 25.7 weeks, indicating that displaced workers continue to face extended job search periods.

 

Layoffs and Job Indicators

Layoffs declined by 217,000 in March, reflecting a reduction of 168,000 permanent layoffs and 48,000 temporary layoffs. The number of job leavers increased by 31,000. Employment in temporary help services—a leading indicator of labor market conditions—increased by 4,400, reversing a loss of 100 in February. The number of individuals working part time for economic reasons rose by 101,000 to 4.50 million, while the share of multiple jobholders remained unchanged at 5.1% of total employment.

 

Wages and Hours

Average hourly earnings increased 0.2% month over month in March, below expectations of 0.3% and slower than February’s 0.4% gain. On a year‑over‑year basis, wage growth slowed to 3.5%, below expectations of 3.7% and down from 3.8% in February, marking the lowest rate since May 2021.

 

Average weekly hours worked edged down to 34.2 in March from 34.3 in February, also below market expectations. Slowing wage growth and fewer hours worked may pose challenges for consumers, particularly as higher gasoline and other prices tied to geopolitical tensions place additional pressure on household budgets.

 

Weekly Jobless Claims – Week Ending March 28:

The Labor Department reported that initial jobless claims declined by 9,000 to 202,000 for the week ending March 28, down from a revised 211,000 the prior week and below market expectations of 212,000. Claims have now remained well below the 220,000-level recorded during the same week last year for seven consecutive weeks. The four‑week moving average fell by 3,000 to 207,750 from 210,750, signaling continued limited layoffs and a stable labor market.

 

Continuing claims—which measure the number of individuals receiving unemployment benefits—increased by 25,000 to 1.841 million for the week ending March 21, up from a revised 1.816 million the prior week and slightly above expectations of 1.837 million. Despite the increase, continuing claims remained below the 1.889 million level recorded during the same week last year. Meanwhile, the four‑week moving average of continuing claims declined by 7,500 to 1.839 million from 1.846 million.

 

***************************************************************************************************************

WEEKLY MARKET ANALYSIS:

Equity Market

Major equity markets rebounded sharply during the Good Friday holiday‑shortened week, snapping a five‑week losing streak. The rally was driven by strong gains on Tuesday and Wednesday, supported by reports of productive discussions between the U.S. and Iran, raising hopes for a potential ceasefire in the month‑long conflict. Markets were also buoyed by stronger‑than‑expected manufacturing and retail data, despite heightened military threats and mixed messaging from President Trump, who delivered a national address on Wednesday evening.

 

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

• Nasdaq: +4.44% (weekly) & -5.86% (YTD), closing at 21,879
• S&P 500: +3.36% (weekly) & -3.84% (YTD), ending at 6,583
• Dow Jones Industrial Average: +2.96% (weekly) & -3.24% (YTD), closing at 46,505
• Russell 2000: +3.28% (weekly) & +1.94% (YTD), ending at 2,530

 

Oil Market

For the week ending April 3, 2026, crude oil prices were mixed but remained elevated amid concerns that the ongoing conflict could lead to prolonged disruptions to oil shipments through the Strait of Hormuz. Brent crude, the global benchmark, declined modestly by $3.54, or 3.1%, falling from $112.57 to $109.03 per barrel. In contrast, West Texas Intermediate (WTI), the U.S. benchmark, surged $11.90 to $111.54 per barrel from $99.64 a week earlier.

 

Heightened risks to international supply relative to U.S. production typically widen the Brent–WTI spread, which has recently averaged roughly $13–$14 per barrel, with Brent trading above WTI. However, the surge in WTI prices pushed it above Brent—a rare occurrence—reflecting the greater sensitivity of WTI futures to near‑term demand pressures. This move was driven by expectations of tighter U.S. supplies as overseas buyers rushed to secure American crude. Brent contracts, which are more heavily weighted toward later delivery, were less affected, resulting in a backward-dated market structure in which near‑term prices exceed longer‑dated prices.

 

Reflecting rising energy costs, U.S. average gasoline prices tracked by AAA have surged 37.6%, or approximately $1.12 per gallon, increasing from $2.98 to $4.10 since the Middle East conflict began in late February 2026.

 

Treasury Market

Treasury yields edged lower this week across most maturities, with more pronounced declines at the one‑year tenor and longer. The 10‑year Treasury yield ended the week at 4.35%, down 9 basis points, while the 5‑year yield fell 7 basis points to 3.99%.

 

The pullback in yields was driven primarily by reduced safe‑haven demand amid optimism around a potential de‑escalation of the conflict with Iran, stronger‑than‑expected manufacturing and retail data, and robust month‑end and quarter‑end institutional rebalancing flows. Since the start of the conflict, however, Treasury yields have risen sharply across the curve, with the 2‑year, 5‑year, and 10‑year yields up approximately 46, 48, and 38 basis points, respectively.

 

Key Treasury Yield Movements:

• 2-year yield: 3.84% (-0.04%)
• 5-year yield: 3.99% (-0.07%)
• 10-year yield: 4.35% (-0.09%)

 

Rate Cut Expectations

Similar to last week, markets continue to price in no rate cuts in 2026, while assigning almost no probability to a rate hike later in the year. Markets also continue to expect no rate cuts in 2027, with only a low implied probability—roughly 20–35%—of a rate cut at the April, June, and July meetings.

 

***************************************************************************************************************

NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

• 4/6 (Monday)
  • ISM Services Index for March
• 4/7 (Tuesday)
  • Consumer Credit for February
  • Durable Goods for February
• 4/9 (Thursday)
  • Personal Income and Spending, and PCE Price Index for February
  • Weekly Initial Claims and Continuing Claims
  • Final Q4 2025 GDP
• 4/10 (Friday)
  • CPI for March

*******************************************************************************************************

For a visual representation of this week’s economic review, you can view or download the slide deck here: 04.03.2026 CBC Weekly Economic Update Slides

Mark Yoon, CFA CPA

EVP & CFO of Commercial Bank of California

 

Thomas McCullough

EVP of Commercial Bank of California

_______________________________________________________________________

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.