Inflation Hits 3-Year High Under New Fed Chief Warsh

Consumer prices reached their highest level in nearly three years under new Federal Reserve chief Kevin Warsh, according to the first inflation report of his tenure. The personal consumption expenditures (PCE) price index rose at an annual rate of 3.8%, reported by the Commerce Department on Thursday.

The increase was slightly below economists' expectations of a 3.9% rise, as polled by FactSet and Reuters. Core prices, excluding food and energy, increased by 0.2% for the month and 3.3% annually, according to CNBC. The Federal Reserve uses PCE measures as its primary forecasting tool.

Rising energy prices played a significant role in this inflation surge, driven by escalating tensions between the U.S. and Iran. Oil prices jumped over 2%, with Brent crude prices up over 1%. The national average retail gasoline price shot up 12.3% in April, according to data from the U.S. Energy Information Administration.

The ongoing conflict has split global markets into clear winners and losers. Oil prices have increased approximately 40% since the war began three months ago, with crude oil prices currently above $100 per barrel. A record 400 million barrels of oil were released from strategic reserves to cushion supply loss.

U.S. stocks and South Korea's Kospi reached record highs, while European shares neared all-time highs. SK Hynix topped $1 trillion in market value for the first time on May 27, joining Samsung Electronics and Micron Technology due to an AI-driven rally. Conversely, the S&P 500 passenger airlines index dropped more than 6% since the conflict began due to global flight disruptions.

Treasury yields were little changed Thursday after a report that U.S. and Iranian negotiators agreed to extend the ceasefire sent oil prices lower, even as new U.S. data reflected persistent inflation. The yield on the 10-year U.S. Treasury note dipped slightly to 4.467%. The 2-year Treasury note yield, which is more sensitive to short-term Federal Reserve interest rate decisions, was little changed at 4.025%. The longer-dated 30-year Treasury bond yield fell by one basis point lower at 4.997%.

St. Louis Federal Reserve President Alberto Musalem on Thursday said the central bank may need to increase its policy rate if inflation does not resume easing within the next six months, according to Reuters. 'If we don't see disinflation in the next one to two quarters, that would concern me,' Musalem stated at a Central Bank of Iceland and Northwestern University economic conference in Reykjavik.

Musalem emphasized his concerns about inflation expectations continuing to drift higher or remain elevated, signaling public skepticism about the Fed's ability to control inflation. He also warned against banking on AI's potential for boosting productivity without clear evidence, contrasting with Warsh's belief that AI will be a strong disinflationary force.