Surging Inflation Nears 3-Year High

shopping_SIPA-USA
Sipa USA
By Yuval Rosenberg and Michael Rainey

Happy Thursday! U.S. and Iranian negotiators have reportedly reached a tentative deal to extend the current ceasefire by 60 days and start talks on Tehran's nuclear program. President Trump must still sign off on the agreement, and he has told mediators that he wants a couple of days to think it over, according to Axios, which first reported the deal. Also today - though, admittedly, not quite as important - Milli Vanilli, Morris Day and Young MC said they will not be participating in this summer's Freedom 250 shows on the National Mall, contrary to the announced lineup we told you about yesterday. Young MC said in an Instagram post that he hopes "to perform in D.C. in the near future at an event that is not so politically charged."

Surging Inflation Nears 3-Year High

Inflation continued to heat up in April, according to data released by the Commerce Department on Thursday.

The personal consumption expenditures price index rose 0.4% in April from the month before. On an annual basis, the PCE inflation rate hit 3.8%, up from 3.5% in March and the highest level since May 2023.

The core PCE rate, which ignores volatile food and fuel prices to provide a better sense of the underlying trend, rose 0.2% on a monthly basis and 3.3% on an annual basis - the highest annual reading since November 2023. The preferred inflation measure of officials at the Federal Reserve, the core rate shows clearly that inflation continues to run well above the central bank's 2% target.

More than just an energy shock: The results were largely as expected, but that's because analysts expect to see an increase in inflation driven by the war in the Middle East.

Heather Long, chief economist at Navy Federal Credit Union, said the data indicate that inflationary pressure is spreading throughout the economy. "50% of items in the CPI inflation report are growing at 3% or higher right now," she wrote on X. "It's a telling metric... it underscores that this is more than just an 'energy shock.' The inflation problem is deeper and wider than that."

A falling savings rate: Long noted that the report shows that the savings rate dropped sharply, falling from 5.5% in April 2025 to 2.6% in April 2026, one of the lowest readings in more than 20 years, suggesting that Americans are scrambling to maintain consumption levels as prices rise. And personal incomes actually fell slightly after adjusting for taxes.

"This is not sustainable," Long wrote. "People continue to spend ... but their incomes are not keeping up."

More pressure on prices: Dan North, senior economist at Allianz Trade North America, said that while the monthly increase in the core inflation rate was relatively modest, the trend is moving in the wrong direction. "[I]t's the wrong way, and we think it will continue in the wrong way because there are so many inflation pressures in the pipeline," he told the Associated Press.

Omair Sharif of Inflation Insights said in a note to clients that there was little good news in the report. "Core inflation is likely to be firmer next month and risks to the upside from the lagged impact of the energy surge remain in place," he wrote, per Politico.

RSM Chief Economist Joseph Brusuelas also predicted that the inflationary trend will likely continue. "With pricing dynamics continuing to show upward pressure, we have not yet witnessed the peak in either top-line or core inflation," he wrote in a research note.

Growing expectations for a Fed hike: Brusuelas noted that the Fed typically "looks through" or heavily discounts inflation caused by supply shocks, since it tends to be a one-time event, but the breadth of the growing inflationary wave may force Fed officials to reconsider, even with a dovish new leader, Kevin Warsh, now at the helm. Accordingly, concerns about persistent, elevated inflation could put interest hikes on the table over the next few months.

"Should the war in the Middle East not be wrapped up soon, the Federal Reserve will find it difficult to look through the increase in inflation driven by the supply shock that followed the outbreak of hostilities three months ago," Brusuelas said. "While we do not anticipate a rate hike at the Fed's next meeting on June 17, we do think that the July policy decision will be a live event."

Number of the Day: 1.6%

The U.S. economy grew more slowly in the first quarter of 2026 than first estimated, the Commerce Department said Thursday. The second estimate of Q1 growth shows that gross domestic product expanded at a rate of 1.6% between January and March, down from the initial estimate of 2.0%. The downward revision was driven largely by weaker-than-first-estimated consumer spending and inventory accumulation.

Although the downward revision came as a surprise to many analysts, who expected to see no change in the GDP estimate, the economics team at Goldman Sachs said the weaker results are not affecting their outlook for growth in the current quarter. "On net, we left our Q2 GDP tracking estimate unchanged at +2.0%," the Goldman analysts wrote in a note to clients this morning.

Moody's Chief Economist Mark Zandi was far more pessimistic. "The economy isn't just soft, it's struggling," he wrote Thursday following the release of the GDP revision and other economic data. "The Iran war needs to end, and the Strait of Hormuz needs to be reopened soon, or recession will become more likely than not."

Democrats Want to Tax the $1.8 Billion Trump 'Anti-Weaponization' Fund

As Democrats plot ways to block the Trump administration's controversial plan for a $1.8 billion "anti-weaponization" fund, some have embraced one option: tax it all.

Democrats in Congress last week introduced legislation that would impose a 100% tax on payments from the fund, which they call a "slush fund" that would direct taxpayer money to Trump allies, including rioters who attacked the Capitol on January 6, 2021.

"Congress must do whatever it takes to prevent Donald Trump from stealing $1.8 billion from the American people to fund right-wing violence and handouts to insurrectionists," Sen. Ron Wyden said in a statement. "This money doesn't belong to Donald Trump, it belongs to the taxpayer."

Democratic Rep. Mike Thompson of California first introduced the bill, titled the "Stop Letting United States Heads Funnel Unauthorized Nontransparent Dollars Act of 2026" (SLUSH FUND Act). The measure would also impose a 50% penalty on any willful attempt to evade the tax.

California Democratic Gov. Gavin Newsom on Wednesday embraced the tax idea, suggesting he could pursue it at the state level.

"One thing that I think we're going to try to do, with your support, is tax 100% anyone from California that receives any of those funds," Newsom said during a news conference. "And that's an action the state of California can take. It's an action we look forward to taking."

Newsom's announcement follows a similar one from Alex Bores, a state lawmaker in New York who is running for Congress, who this week introduced what he calls "the Anti-Insurrectionist Act," legislation that would impose a 100% state tax on payouts from the Trump settlement fund. "If you storm the Capitol and you take from this slush fund, too bad, we're taking it," Bores said. New Jersey lawmakers are reportedly also drafting legislation to tax fund payouts.

Some Republicans have raised concerns about the fund as well. The backlash to the plan forced Senate Republican leaders to cancel a planned vote last week on a $70-plus billion funding package for immigration enforcement.

The Trump administration insists that the fund is not partisan or limited to Republicans but has not ruled out payments to those involved in the January 6 riot.

Asked about the Newsom proposal during today's White House press briefing, Treasury Secretary Scott Bessent trashed the idea. "There is no cure for stupid," Bessent said.

Fiscal News Roundup

Views and Analysis