CPI Spike, Soft GDP, and Market Rally Signal a Cautious Outlook

This week’s economic data includes: (1) Q4 2025 GDP (final estimate), (2) Consumer Price Index (CPI) for March, (3) real earnings 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:

The final Q4 2025 GDP estimate revised economic growth for the quarter down to 0.5% annualized, driven by weaker investment and softer private demand during the government shutdown, while full‑year GDP growth held at 2.1% and early Q1 2026 growth is tracking a modest 1.3%.

The final estimate for Q4 2025 GDP revised growth lower to a 0.5% annualized pace, down from 0.7% in the prior estimate and sharply slower than the 4.4% growth recorded in Q3, reflecting weaker investment—primarily a decline in private inventory investment, especially in wholesale trade. For the full year, GDP grew 2.1%, unchanged from earlier estimates and the slowest annual pace since 2020, driven mainly by consumer spending and investment. A key measure of underlying private demand, growth in final sales to private domestic purchasers, was revised down to 1.8%, signaling some softening during the government shutdown, while the Atlanta Fed’s GDPNow model currently projects real GDP growth of 1.3% for Q1 2026.

March CPI jumped 0.9%—the largest increase since mid‑2022—driven overwhelmingly by a surge in energy prices tied to the Iran war, while food inflation cooled, core inflation remained contained, and elevated commodity costs are likely to keep the Fed on hold amid renewed inflation risks.

Consumer prices rose sharply in March, with CPI increasing 0.9% month over month—the largest gain since June 2022—up from 0.3% in February but in line with elevated expectations. The surge was driven overwhelmingly by energy costs tied to the Iran war, with gasoline accounting for 71% of the monthly increase, alongside smaller contributions from shelter, airline fares, apparel, and fresh fruits and vegetables. On a year-over-year basis, CPI rose 3.3%, up from 2.4% in February and the highest level since May 2024, though slightly below market expectations.

Food prices were unchanged overall, as declining grocery prices offset modest increases in food away from home. Grocery prices fell 0.2%, led by broad-based declines in meats, cereals, and dairy, including a sharp drop in egg prices, although beef prices remained elevated year over year. These declines were partially offset by higher prices for fresh fruits and vegetables and coffee. On an annual basis, food inflation continued to cool, with overall food prices up 2.7%, grocery prices up 2.0%, and food away from home prices up 3.8%.

Energy prices surged 10.9% in March, marking the largest monthly increase since 2005, driven by record spikes in gasoline and fuel oil. Outside of energy, price pressures remained relatively contained: core goods prices rose modestly, suggesting some tariff pass-through, while core services inflation slowed slightly despite higher shelter and airline fare costs. Core CPI increased 0.2% month over month and 2.6% year over year. Overall, the data signal early inflationary effects from geopolitical tensions, with rising energy and commodity prices likely to keep inflation risks elevated and the Federal Reserve inclined to hold rates steady through 2026 provided the labor market demonstrates continued resilience.

Real earnings fell sharply in March as inflation surged, with real average hourly earnings down 0.6% month over month and real weekly earnings down 0.9%, signaling mounting pressure on consumer purchasing power and a potential drag on economic growth.

Real earnings declined sharply in March as inflation surged, with real average hourly earnings falling 0.6% month over month—reversing a 0.1% increase in February—and marking the largest decline since June 2022, as modest nominal wage gains were more than offset by a sharp rise in CPI. Real average weekly earnings dropped 0.9% due to both lower real hourly earnings and a decline in average weekly hours. On a year-over-year basis, real average hourly earnings rose just 0.3%, the weakest pace since May 2023, while real average weekly earnings increased only 0.2%, down from 1.6% in February. The combination of softer real wage growth, fewer hours worked, and elevated inflation could weigh on consumer spending and slow economic growth in the months ahead.

Weekly initial jobless claims rose modestly due to holiday-related volatility, but continuing claims fell to their lowest level since May 2024, indicating that overall labor market conditions remain stable.

Weekly initial jobless claims rose to 219,000 for the week ending April 4, slightly above expectations due largely to holiday-related volatility, though claims remain below year‑ago levels and consistent with a resilient labor market. Meanwhile, continuing claims fell to 1.794 million—the lowest since May 2024—and their four-week moving average declined, reinforcing signs that labor market conditions remain stable despite short-term fluctuations.

Markets rallied on de‑escalating Middle East tensions, with equities posting their best week since November 2025, oil prices plunging on improved supply prospects, Treasury yields easing modestly despite inflation surging, and investors continuing to price in no Federal Reserve rate cuts through 2027.

Equity markets delivered their strongest weekly performance since November 2025, rallying on optimism sparked by a two‑week ceasefire with Iran and the reopening of the Strait of Hormuz, which helped ease geopolitical and energy supply concerns despite surging consumer prices. Gains were broad‑based, led by the Nasdaq and Russell 2000, while the S&P 500 and Dow also posted solid advances, though most major indexes remain slightly negative year to date except for small caps.

In commodities and rates, oil prices recorded their largest weekly decline since April 2020 as geopolitical risks eased and U.S. crude inventories increased, though gasoline prices remain sharply higher since the conflict began. Treasury yields edged modestly lower on the week, falling after the ceasefire announcement but partially rebounding after inflation data surged, with longer‑term yields still significantly higher since the start of the conflict. Market expectations for monetary policy remain unchanged, with investors continuing to price in no Federal Reserve rate cuts in 2026 and little confidence in easing even in 2027.

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DETAILED ANALYSIS:

Q4 2025 GDP – Final Estimate:

GDP growth was revised lower in the third and final estimate for the fourth quarter. The economy expanded at a 0.5% annualized pace—the slowest in three quarters—down from 0.7% in last month’s second estimate and well below the 4.4% growth rate in the third quarter. The downward revision was driven primarily by weaker investment, led by a decline in private inventory investment, particularly in wholesale trade.

For the full year, real GDP increased 2.1%, unchanged from the prior estimate and marking the slowest annual growth rate since 2020. Full‑year growth primarily reflected gains in consumer spending and investment.

Excluding government spending, inventories, and trade, final sales to private domestic purchasers for the fourth quarter—a key measure of underlying private demand—were revised down to 1.8% from 1.9% in the second estimate, indicating that private demand softened during the government shutdown. Looking ahead, the Atlanta Fed’s GDPNow model estimates real GDP growth of 1.3% for the first quarter of 2026.

CPI – March Update: 

The Bureau of Labor Statistics (BLS) reported that consumer prices rose sharply in March, with CPI increasing 0.9% month over month, up from 0.3% in February and the largest monthly gain since June 2022 (1.3%), which followed Russia’s invasion of Ukraine. The March result was in line with expectations and was driven primarily by a sharp increase in gasoline prices tied to the Iran war. Key contributors to the monthly increase were:

• Gasoline: 71.0%
• Shelter: 11.0%
• Airline fares: 3.0%
• Apparel: 3.0%
• Fresh fruits & vegetables: 1.6%

On a year-over-year basis, CPI rose 3.3%, up from 2.4% in February, slightly below market expectations of 3.4%, and the highest level since May 2024.

Food Prices

Food prices were unchanged month over month in March, following a 0.4% increase in February. Grocery store prices declined 0.2%, with four of the six major food categories posting decreases. The largest declines were seen in meats, poultry, fish, and eggs (-0.6% MoM, -0.3% YoY), cereals and bakery products (-0.6% MoM, +2.1% YoY), and dairy products (-0.6% MoM, -1.6% YoY). Within meats, poultry, fish, and eggs, beef prices declined 0.6% month over month but remained up 12.1% year over year, pork prices fell 0.6% month over month and rose 0.5% year over year, and egg prices dropped sharply (-3.4% MoM, -44.7% YoY). These declines were partially offset by a 1.4% increase in fresh fruits and vegetables (+4.2% YoY) and a 1.3% increase in coffee prices (+18.7% YoY).

Prices for food away from home rose 0.2% month over month in March, down from 0.3% in February. On an annual basis, food prices increased 2.7%, down from 3.1% in February, with grocery store prices up 2.0% year over year and food away from home prices up 3.8%.

Energy Prices

Energy prices surged 10.9% month over month in March, up from 0.6% in February and marking the largest monthly increase since September 2005. The move was driven by a 21.2% spike in gasoline prices—the largest monthly increase on record—and a 30.7% increase in fuel oil, the largest since February 2000. On a year-over-year basis, energy prices rose 12.6%, led by fuel oil (+44.2%) and gasoline (+18.9%).

Goods Prices (Excluding Food and Energy)

Core goods prices increased 0.1% in March, matching February’s pace. Notable increases were recorded in apparel (+1.0%), toys (+2.3%), and motor vehicle parts and equipment (+0.7%), suggesting that tariff-related costs are being passed through to consumers. Used vehicle prices declined for a fourth consecutive month, while prices for new vehicles increased modestly by 0.1%.

Services Prices (Excluding Energy)

Core services prices rose 0.2% month over month, slightly below February’s 0.3% increase. Shelter costs, accounting for roughly 31% of CPI, increased 0.3%, up from 0.2% in February. Airline fares rose 2.7% as consumers rushed to lock in prices amid rising jet fuel costs linked to the Iran war, while hotel and motel prices slowed to a 0.2% increase. Medical care services were unchanged, while water, sewer, and trash collection services rose 0.5%. In contrast, recreation services prices declined 0.4%. Tax return preparation and accounting fees rose 2.2% month over month after five consecutive declines, though they remain down 12.7% year over year, likely reflecting increased use of AI-driven tax and accounting tools.

Core CPI

Excluding food and energy, core CPI rose 0.2% month over month in March, unchanged from February and below expectations of 0.3%. On a year-over-year basis, core CPI increased 2.6%, up slightly from 2.5% in February.

Commentary

March CPI data highlight the early inflationary impact of the Iran war, driven first and foremost by sharply higher energy prices. While price pressures outside of energy remain relatively contained, elevated oil prices and fertilizer disruptions are likely to push costs higher across transportation, agriculture, chemicals, and other downstream goods and services. Even if geopolitical tensions ease soon, higher prices are likely to persist as energy and commodity supply chains normalize slowly. Given renewed inflation risks, the Federal Reserve is likely to keep interest rates on hold through the remainder of 2026, subject to the labor market remaining resilient.

Real Earnings – March Update:

The Bureau of Labor Statistics (BLS) reported that real earnings—wages adjusted for inflation—declined sharply in March. Real average hourly earnings fell 0.6% month over month, reversing a 0.1% increase in February and marking the largest decline since June 2022. The decrease reflected a modest 0.2% increase in nominal hourly earnings that was more than offset by a 0.9% increase in CPI. Real average weekly earnings declined 0.9% month over month, driven by the drop in real hourly earnings and a 0.3% reduction in average weekly hours worked.

On a year-over-year basis, real average hourly earnings rose 0.3% in March, the weakest pace since May 2023, reflecting a 3.5% increase in nominal wages alongside a 3.3% rise in consumer prices. With average weekly hours unchanged from a year ago, real average weekly earnings increased just 0.2% year over year, down sharply from 1.6% in February.

The deterioration in real wage growth, combined with reduced hours worked and a surge in inflation, could weigh on consumer spending and pose a headwind to economic growth in the months ahead.

Weekly Jobless Claims – Week Ending April 4:

The Labor Department reported that initial jobless claims increased by 16,000 to 219,000 for the week ending April 4, up from a revised 203,000 the prior week and above market expectations of 210,000. The increase was largely attributed to holiday-related volatility surrounding Passover and Good Friday. Despite the uptick, claims remained below the 223,000-level recorded during the same week last year for eight consecutive weeks. The four‑week moving average rose modestly by 1,500 to 209,500.

Continuing claims—which reflect the number of individuals receiving unemployment benefits—fell by 38,000 to 1.794 million for the week ending March 28, down from a revised 1.832 million and below expectations of 1.828 million. This marked the lowest level since mid‑May 2024 and remained below the comparable level from a year ago. The four‑week moving average of continuing claims declined by 13,250 to 1.823 million, reinforcing signs of a stable labor market.

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WEEKLY MARKET ANALYSIS:

Equity Market

Equity markets posted strong gains, marking their best weekly performance since November 2025. The rally was driven primarily by the announcement of a two‑week ceasefire with Iran and the reopening of the Strait of Hormuz, which helped offset concerns about surging consumer prices.

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

• Nasdaq: +4.68% (weekly) & -1.46% (YTD), closing at 22,903
• S&P 500: +3.56% (weekly) & -0.42% (YTD), ending at 6,817
• Dow Jones Industrial Average: +3.04% (weekly) & -0.31% (YTD), closing at 47,917
• Russell 2000: +3.97% (weekly) & +5.99% (YTD), ending at 2,631

Oil Market

For the week ending April 10, 2026, crude oil prices recorded their largest weekly decline since April 2020. The drop was driven by the two‑week ceasefire agreement between the U.S. and Iran, the restoration of safe passage through the Strait of Hormuz, and a build‑up in U.S. crude oil inventories. Brent crude fell $13.87, or 12.7%, from $109.03 to $95.20 per barrel, while West Texas Intermediate (WTI) declined $14.97, or 13.4%, from $111.54 to $96.57 per barrel.

U.S. average gasoline prices tracked by AAA rose modestly by 0.8%, or approximately $0.03 per gallon, increasing from $4.104 to $4.135. Since the Middle East conflict began in late February 2026, average gasoline prices have surged $1.15, or 38.6%, from $2.984.

Treasury Market

Treasury yields edged slightly lower across most maturities during the week. Yields declined midweek following the ceasefire announcement before retracing some of those gains after consumer prices surged on Friday. The 10‑year Treasury yield ended the week at 4.31%, down 4 basis points, while the 5‑year yield fell 5 basis points to 3.94%.

Despite the recent pullback, Treasury yields have risen sharply since the start of the conflict, with longer maturities seeing the largest moves. The 2‑year, 5‑year, and 10‑year yields are up approximately 43, 43, and 34 basis points, respectively, over that period.

Key Treasury Yield Movements:

• 2-year yield: 3.81% (-0.03%)
• 5-year yield: 3.94% (-0.05%)
• 10-year yield: 4.31% (-0.04%)

Rate Cut Expectations

Market expectations remain largely unchanged, with investors continuing to price in no Federal Reserve rate cuts in 2026 and assigning minimal probability to a rate hike later in the year. Markets also continue to expect no rate cuts in 2027, though implied probabilities have increased modestly compared with last week, ranging between roughly 30% and 64% across various 2027 meetings—still not signaling a high‑confidence outlook for easing.

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NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

• 4/13 (Monday)
  • Existing Home Sales for March
• 4/14 (Tuesday)
  • Producer Price Index for March
  • NFIB Small Business Optimism for March
• 4/15 (Wednesday)
  • Fed Beige Book
• 4/16 (Thursday)
  • Weekly Initial Claims and Continuing Claims

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For a visual representation of this week’s economic review, you can view or download the slide deck here: 04.10.2026 CBC Weekly Economic Update Slides

Mark Yoon, CFA CPA

EVP & CFO of Commercial Bank of California

Thomas McCullough

EVP of Commercial Bank of California

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