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Next year's inflation forecasts are on the rise and above target

Robert Brusca

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The ZEW diffusion survey (an up-minus-down survey) showed mixed improvements in the economic situation and improvements for macroeconomic expectations in June. The report shows the economic situation improving in the United States and China, with the euro area taking a small step back (to -43.4 in June from -41.4 in May), while Germany also saw a step back in the economic situation (to -81.0 from -77.8). The ranking metrics show the German reading as lower only 13.8% of the time—the weakest showing among the four. The EMU ranking is at a 36.7 percentile, with the U.S. ranking close to that at a 42.5 percentile. China has a 76.2 percentile ranking over a shorter timeline.

Macro expectations show solid improvements reported in Germany, the U.S., and China. Macroeconomic rankings all are muted, with the U.S. at a 39.9 percentile standing as the strongest, followed by Germany at a 35.2 percentile standing and China at a 22.2 percentile standing.

Inflation expectations are still high across the board, ranging from a low percentile standing for the EMU, Germany, and China—from a euro area low of 78.6 to a high standing for this group at 85.7 for China. In contrast, the U.S. ranking is still high, but only at its 61.8 percentile. And all the inflation expectations readings fell in June as optimism on opening the Strait of Hormuz has been growing. 

Nonetheless, expectations for short-term rates have been rising. They rose solidly in the EMU and China, and strongly in the U.S., from 10.5 in May to 38.5 in June.

In contrast, long-term rate expectations rose across the board as well but by modest amounts. The rankings for short-term expectations are stronger for all three countries compared to the ranking on long-term rate expectations. I suppose we can understand that as expectations of anti-inflation medicine.

Stock markets are assessed as higher month-to-month in the EMU and in all three countries. China has a strong ranking for its stock market assessment at its 81st percentile. The U.S. standing is above its median at its 51.5 percentile; the euro area expectation is at its 34.2 percentile, with German stock market expectations still weak at its 23.6 percentile.

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The pending conflict-ending deal in the Middle East should be a catalyst for further improvement. While the U.S.-Iran deal is not yet announced in detail—or even signed—market reactions are clear-cut across the board; there is no sign that this deal is expected to wither so soon. But it still has issues and contentious elements, such as Iran’s nuclear ambitions and the fact that the Israel is not on board with what it regards as a too-early exit from hostilities. Israel wants regime change and warns of a more difficult future without one.

ZEW Shows Mixed Conditions and an Expectations Rebound

Winnie Tapasanun

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Industrial production (IP) increased a less-than-expected 0.1% m/m in May, the third monthly gain in four months, following an upwardly revised 0.9% rise in April (+0.7% initially) and a 0.3% decline in March (unrevised), according to data from the Federal Reserve Board. A 0.3% m/m May increase had been expected in the Action Economics Forecast Survey. The year-on-year rate accelerated to 1.7% in May, the highest since January, from 1.4% in April (0.3% in May 2025). The May IP index at 102.6 was 3.3% above a low of 99.3 in November 2024 and 3.4% above a low of 99.2 in January 2024.

By **industry groups**, manufacturing production was essentially unchanged m/m (+1.4% y/y) in May after upwardly revised gains of 0.7% in April (+0.6% initially) and 0.2% in March (+0.1% previously). Durable goods production rose 0.8% (3.2% y/y) in May, the fourth m/m rise in five months, after a 1.1% increase in April. Within durables, almost all categories rose m/m in May, led by a 2.3% gain (-2.0% y/y) in wood products, followed by increases of 1.8% (3.1% y/y) in nonmetallic mineral products, 1.3% (4.4% y/y) in primary metals, 1.2% (-1.7% y/y) in motor vehicles & parts, 1.0% (-4.5% y/y) in furniture & related products, 0.9% (10.3% y/y) in computer & electronic products, 0.8% (2.5% y/y) in fabricated metal products, 0.5% (6.9% y/y) in aerospace & miscellaneous transportation equipment, 0.5% (2.7% y/y) in electrical equipment, appliances & components, and 0.2% (4.3% y/y) in machinery. Notably, aircraft & parts production climbed 1.1% (11.7% y/y), the fourth consecutive m/m rise, after a 2.6% April gain. Meanwhile, miscellaneous durable goods were virtually unchanged m/m (+0.9% y/y) in May following a 0.8% decline in April.

Nondurable goods production slid 0.9% (-0.6% y/y) in May, the first m/m slide since January, after a 0.3% increase in April. The May output decline was led by a 3.0% drop (-1.1% y/y) in petroleum & coal products, followed by decreases of 2.4% (-4.1% y/y) in textiles & product mills, 1.6% (-2.3% y/y) in printing & related support activities, 0.8% (0.0% y/y) in chemicals, 0.8% (-3.0% y/y) in paper, 0.5% (-0.4% y/y) in food, beverages & tobacco, and 0.3% (-0.2% y/y) in plastics & rubber products. In contrast, apparel & leather goods—the only rising category—recovered 2.4% (-0.1% y/y) in May following two successive m/m declines.

Mining activity advanced 1.3% (2.0% y/y) in May, the fourth m/m gain in five months, after a 0.2% increase in April (-0.1% initially). Utilities output, however, fell 0.4% (+3.1% y/y) following a 2.2% April rebound (+1.9% initially), reflecting a 1.7% drop (+1.8% y/y) in electric utilities output and an 8.5% rise (12.5% y/y) in natural gas utilities output.

By **market groups**, construction supplies production increased 1.1% (2.3% y/y) in May, up for the second time in three months, reversing a 0.3% decline in April. Business equipment output rose 0.6% (5.7% y/y), the fifth m/m rise in six months, following a 1.8% April gain. Materials production grew 0.3% (1.9% y/y), the third m/m increase in four months, after a 0.7% April rise. In contrast, consumer goods output fell 0.5% (-0.6% y/y) after a 1.2% April rebound, reflecting a 0.5% increase (-3.0% y/y) in durable consumer goods and a 0.8% decrease (+0.1% y/y) in nondurable consumer goods.

In **special classifications**, factory output of selected high-tech industries rose 1.8% (12.6% y/y) in May on top of an upwardly revised 2.2% rise in April (+1.0% initially)—marking the third straight m/m gain and the seventh in eight months. Manufacturing production excluding selected high-tech industries held steady m/m (+1.1% y/y) in May after a 0.7% increase in April, while manufacturing production excluding selected high-tech and motor vehicles & parts dipped 0.1% (+1.3% y/y) following a 0.5% April rise.

Capacity utilization inched up to 76.2% in May, the highest since July 2025, from 76.1% in April (unrevised). The result matched the forecast by the Action Economics Forecast Survey. The May reading was 3.2 percentage points below its long-run (1972–2025) average. Manufacturing capacity utilization held at 75.7% in May and April (75.8% previously), the highest since September 2025; the May rate was 2.5 percentage points below its long-run average.

Industrial production and capacity data are in Haver’s **USECON** database. Additional detail on production and capacity utilization can be found in the **IP** database. The expectations figures come from the **AS1REPNA** database.

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- May IP +0.1% (+1.7% y/y), third m/m increase in four months, led by a 1.3% gain in mining.
- Manufacturing unchanged (+1.4% y/y), w/ durables +0.8% and nondurables -0.9%.
- Selected high-tech +1.8%, third straight m/m rise; motor vehicles +1.2%, fifth gain in six mths.
- Utilities -0.4%, led by a 1.7% drop in electric utilities output.
- Key categories in market groups mostly up.
- Capacity utilization up to a 10-month-high 76.2%; mfg. capacity utilization steady at 75.7%.

U.S. Industrial Production Up Marginally in May; Manufacturing Flat

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The economy watchers survey, along with other surveys, was doing fine until about March in the wake of the Iran war and the closing of the Strait of Hormuz. With that action, the economy watchers index dove sharply from a level of 48.9 in February to 42.2 in March and slipped further to 40.8 in April. The various sector gauges for the retail sector, eating & drinking places, the service sector, and employment are all lower. The only improvement in April came from the future index, where there was some minor optimism about the potential for conditions to improve ahead. And, of course, over the weekend, there is the announcement of a U.S.-Iran deal to end the hostilities between the two countries. That is expected to be signed on Friday and then will put the war into a pause phase for the next 60 days, with the hope that the two sides can come to agreement on some of the stickier elements, including Iran's access to nuclear materials, which has yet to be hammered out.

That omission makes the announcement of this arrangement as a conflict ending deal hugely speculative. Another sticking point is that Israel is not on board and is still engaged in fighting with Hezbollah.

The Teikoku survey, another survey using diffusion indexes that describes Japanese sectors, weakened sharply in March and weakened across the board again in April. Manufacturing, retailing, wholesaling, services, and construction sectors all are posting weaker numbers in April than in March.

The percentile rankings for the economy watchers survey and the Teikoku surveys are both very weak, with the economy watchers standings in the 10th percentile range or lower; the Teikoku rankings are generally higher, around the 30th percentile or perhaps as low as the 20th percentile, as seen in construction. These are still very weak readings. All the raw diffusion readings are below 50, indicating contraction.

The sector indexes from METI on manufacturing and services, which both weakened in March, rebounded in April; in both cases, the April readings were above the February readings. Standings of these indexes based on growth rates are around the 80th percentile; at the 79th percentile for industry and at the 82.5 percentile for the tertiary or services index. Based on the value of the index itself, the tertiary index has a standing at its 98.9 percentile, which we would expect over time for an index that simply grows, as is the case for the METI indexes that are not diffusion indexes. However, the industrial index for Japan has only a 19.9 percentile standing, indicating the stress that Japan's industrial sector has been through, although the current ranking based on the growth rate shows that there is some recovery in progress. The industry level index is 6.3% below its January 2020 level, while the tertiary index is 3.1% above its January 2020 level.

The leading economic index has continued to rise during all these times. It rose in February compared to January, and it rose again in March compared to February; now in April compared to March, it was up again to 115.9, from the March reading of 115.4. Based on year-over-year growth, the leading economic index has a 95.1 percentile standing, which is relatively strong. Based on the index level, we get another strong reading at the 93.2 percentile mark. The leading index is also up 12.9% from its January 2020 level.

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The report of a deal to end the U.S. embargo of Iran and open the Strait of Hormuz without tolls is potentially a real gamechanger for the economic outlook. However, the deal still had pieces to be negotiated, and I, for one, am very wary since we know Iran wants to have nuclear access and the U.S. wants to block it. I just don’t see what a 60-day cooling period for negotiation will do. It will push the U.S. closer to midterm elections and make Trump less willing to engage in conflict with Iran, which is likely to remain intransigent on this issue of nuclear access. I view this as the eye of a hurricane, a period in which there will be calm, with the potential for a reset of confrontation down the road, say 60 days on.

Japan

Japan’s Surveys Mixed in April but Mostly Weak

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Industrial production in the United Kingdom took another step up in April, rising by 0.4% after gaining 1.2% month-to-month in March. Consumer durable goods production fell by 0.7% and capital goods production fell by 0.6% in April, but nondurable goods production increased by 0.8% and intermediate goods output increased by 1.1%. Given the weighting for these sectors, all that amounted to an overall increase of 0.4% in manufacturing output.

In March, there had been month-to-month increases in each of these sectors. Sector by sector gains were quite substantial in March for all the sectors, except for capital goods output up only 0.1%; capital goods output has been weak over the last several months and has come through a period of some significant volatility.

Sequentially, U.K. manufacturing output has registered gains over 12 months, six months and three months. The 12-month gain is only 1%, but over six months output expands at a 6.4% annual rate, and while it stepped back to a 5.7% rate of expansion over three months, there is a hint of acceleration.

**Sequential trends in manufacturing output**
Looking at sectors, there are two that have accelerated over this time span; the output of consumer nondurable goods and the output of intermediate goods. Nondurable goods output rose by 0.4% over 12 months, then stepped up to an 8.1% pace over six months and rose further to an 11.1% pace over three months. For intermediate goods, output declined by 0.9% over 12 months, then switched to post a gain at a 3.2% pace over six months and then again at a 9.7% annual rate over three months. Durable goods output has a hint of acceleration but doesn't quite go over the hurdle as its 8.7% year-over-year growth rate fades to 5.7% over six months but then jumps back to 10.1% over three months. Capital goods output is more indeterminate, with a 3.9% growth rate over 12 months, a very strong 9.5% growth rate over six months, and then a decline of 1.9% at an annual rate over three months.

On a quarter-to-date (QTD) basis, all the sectors are showing increases except for capital goods where output is falling at a 3.1% annual rate. The QTD calculation as of April is only one month into the new quarter; the quarter’s overall output is growing at a 7% annual rate. Manufacturing sectors have recovered fairly well from the difficulties during COVID. The exception is intermediate goods where output as of April 2026 is still 17% below what it was back in January 2020. However, if we evaluate the sectors on their current year-over-year growth rates, we'll find consumer durables has a strong standing at their 86th percentile and capital goods, despite its recent weakness, has a 71.5 percentile standing among its growth rates back to January 2012. However, manufacturing growth overall at 1.0% has only a 43.6 percentile standing. Intermediate goods (that registered a decline over 12 months) have a 40.7 percentile standing. Consumer nondurables, despite their current acceleration string, have only a 25.6 percentile standing, but that's based on the year-over-year growth rate of only 0.4%.

**U.K. industries**
The industry level growth rates and standings for the United Kingdom show more diversity, with current growth rates above their medians for textile & leather as well as for utilities. Food, motor vehicles, and mining generate growth rates below their medians on data back to 2012. However, comparing aggregate levels of output to January 2020 shows three sectors: textile & leather, mining & quarrying, and utilities that report a level of output below where it was over six years ago. The shortfalls in mining & quarrying and in utilities are stunningly weak.

Overall, the manufacturing sector is doing quite well by comparison with past trends. But parts of the U.K. economy are clearly going through some massive changes.

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United Kingdom

U.K. IP Makes Some Recovery

Andrew Cates

**Growth Forecasts Drift Lower — But AI Keeps the Story Complicated**
The three-month change in consensus GDP growth forecasts for 2026, drawn from the latest Blue Chip survey, tells a story of broadly deteriorating expectations with one conspicuous exception. The Middle East conflict and the associated surge in energy prices have left their mark across most major economies. The euro area, the UK and the United States have all seen meaningful downward revisions to their 2026 growth outlooks over the past three months, as higher energy costs squeeze household real incomes and dampen business investment intentions. Energy-importing economies in Europe are particularly exposed, and the Blue Chip panel’s international section confirms that growth expectations across much of the continent remain subdued, highlighting persistent regional differences in economic performance. Japan, Australia, India and several emerging markets have seen modest negative revisions for similar reasons. The lone outlier is Taiwan, whose bar extends well above the rest — a direct reflection of the extraordinary momentum in the semiconductor and AI supply chain. Taiwan’s 2026 growth forecast has been revised up by around 3.2 percentage points over the past three months, a revision of a magnitude rarely seen in this survey for any economy.

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**The More Worrying Signal: 2027 Inflation Forecasts Are Drifting Up Too**
If the GDP revision chart tells a story about the near-term growth impact of the energy shock, this second Blue Chip chart carries a more troubling message for central banks. It shows how consensus forecasts for CPI inflation in 2027 — not 2026, but the year after — have evolved since January. The pattern is striking. Across all four major economies, 2027 inflation expectations have been revised upward since March and now sit at or above the 2% threshold that most central banks treat as their definition of price stability. The US forecast has moved back up to 2.5%; the UK has surged from just above 2% to 2.5%; Japan and the euro area have also drifted higher. Near-term inflation revisions driven by an oil price shock are one thing — central banks can typically look through transitory supply-side disturbances if domestic dynamics remain anchored. But upward revisions to the 2027 outlook are harder to dismiss. They suggest that forecasters are no longer confident the current energy shock will be fully absorbed without leaving a persistent mark on the inflation trajectory — and explain why not a single Blue Chip panellist now expects central banks to simply look through energy-driven inflation.


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**The Fed’s Dilemma: A Benign Labour Cost Story Beneath Hot Headlines**
This week's US inflation data showed headline CPI jumping sharply in May, driven by higher energy costs. But arguably the more telling number was core inflation, which edged only slightly higher in year-on-year terms — a signal that the price shock remains, for now, predominantly supply-side in character rather than one rooted in domestic demand or wage dynamics. That distinction matters, and it is reinforced by the unit labour cost data, which — though backward-looking, with the latest figures pertaining to Q1 2026 — tell a reassuring story. Labour costs are typically the most persistent component of domestic inflation — energy prices can spike and retreat, but once wage growth becomes embedded, it tends to stay. The fact that unit labour cost growth remained subdued through the first quarter, even as headline CPI was climbing, suggests that domestic wage-price dynamics had not yet taken hold. Whether that remains true as the energy shock feeds through is the key question.

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**Supply Chain Stress Returns — and Threatens the PPI Pipeline**
The benign unit labour cost picture is partially offset, however, by a less comfortable development in global supply chains. The New York Fed’s Global Supply Chain Pressure Index has risen sharply in recent months, reversing much of the normalisation achieved since the post-pandemic peak in 2021. The driver is familiar: Middle East instability has disrupted shipping routes, extended delivery times and raised logistics costs across manufacturing supply chains globally. Supply chain pressures feed into producer price inflation with a lag of roughly three to six months, and the PPI pipeline is already showing the effects — US PPI rose 6.0% year-on-year in April, and manufacturing PMI surveys show input cost pressures building across multiple major economies.

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**Energy: The Master Variable**
As we have noted in previous editions of this publication, real energy prices have risen persistently since the early 2000s — a development that may explain more of the trend slowdown in global growth and productivity than is widely appreciated. The chart illustrates that elevated real energy costs are not a new phenomenon: they predate the current Middle East crisis by two decades and were well entrenched long before the US–Iran escalation began in March. What the conflict has done is bring a slow-moving structural story back into sharp focus. For central banks, the implication is an uncomfortable one. Managing inflation whose roots lie in long-run energy supply constraints is a fundamentally different challenge from managing a demand-driven price cycle — and one that conventional monetary policy tools are poorly equipped to address alone. That is not an argument for policy inaction, but it is a reminder that durable price stability is likely to require, among other things, a sustained expansion in the supply of affordable and reliable energy.

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**China’s Exports to the US: A Quiet Normalisation**
Our final chart offers a more encouraging note. This week’s China trade data showed a meaningful improvement in Chinese export growth to the United States, consistent with a partial normalisation of bilateral trade flows that has been evident since the spring tariff truce. Chinese exports to the US had contracted sharply in 2025 as tariff escalation disrupted supply chains. The recovery now underway matters for two reasons. First, it provides a partial deflationary offset: a resumption of Chinese goods exports tends to exert downward pressure on global goods prices, which matters when services and energy inflation are already elevated. Second, it suggests that despite the geopolitical noise, commercial logic continues to reassert itself. Against that backdrop it has been of note that the renminbi remains the strongest-performing major Asian currency year-to-date, a signal that confidence in the trade normalisation story retains some foundation. Whether this continues will depend on whether the current phase of diplomatic pragmatism holds.

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Global financial markets have been unsettled in recent days. Last week’s  stronger-than-expected US employment report wrong-footed investors positioned for a more accommodative Federal Reserve, triggering a sharp reassessment of rate expectations and a notable sell-off in technology stocks — a sector that had been among the primary beneficiaries of the prevailing low-rate narrative. Persistent instability in the Middle East, in the meantime, has continued to keep energy markets on edge, with Brent crude remaining elevated and supply disruption risks showing little sign of abating. Against this backdrop, this week's charts draw on the latest Blue Chip Economic Indicators survey to assess where the global growth and inflation outlook now stands. The headline finding is sobering: GDP growth forecasts have been revised lower across most major economies over the past three months, with the energy shock doing real damage to the outlook in Europe— even as Taiwan's AI-driven semiconductor boom delivers the largest upward forecast revision of any economy in the survey (charts 1 and 2). Inflation expectations tell an equally uncomfortable story, with consensus forecasts for CPI in 2027 now sitting above most central banks' 2% target — a sign that the current shock may be leaving a more persistent scar than policymakers would like. Beneath the headline noise, however, recent US unit labour cost data offer a modestly reassuring signal (chart 3), even as renewed supply chain stress threatens the PPI pipeline (chart 4). We also revisit a structural energy argument made in previous editions of our Charts of the Week document (chart 5), before closing with China's trade data, where a normalisation in export flows to the United States has been quetly unfolding (chart 6).

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Charts of the Week: Inflation at the Crossroads

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The Producer Price Index for final demand rose a stronger-than-expected 1.1% m/m in May, the ninth consecutive m/m rise, after gains of 1.1% in April (+1.4% initially) and 0.7% in March (unrevised), according to the Bureau of Labor Statistics. A 0.7% m/m May increase had been expected in the Action Economics Forecast Survey. The year-over-year rate accelerated to 6.5% in May, the highest since November 2022, from 5.7% in April (2.7% in May 2025). Compared with May CPI data (+0.5% m/m, +4.2% y/y, released on June 10), the PPI figures reinforce the view that U.S. inflationary pressures remain elevated on both the producer and consumer sides.

Producer prices excluding food & energy grew 0.4% (4.9% y/y) in May after rises of 0.7% in April (+1.0% initially) and 0.3% in March (+0.2% previously). A 0.5% m/m increase had been expected. Another core price measure—producer prices less food, energy & trade services—advanced 0.8% (5.1% y/y), the strongest of 13 straight m/m gains, after increases of 0.5% in April (+0.6% initially) and 0.2% in March (unrevised).

The May PPI 1.1% m/m rise was led by a 10.7% jump (36.6% y/y) in energy prices—the fourth consecutive m/m increase and the largest on record—following a 7.5% April gain. The surge in energy prices reflected m/m increases of 23.4% (69.5% y/y) in gasoline, 16.3% (87.0% y/y) in home heating oil & distillates, 15.7% (105.9% y/y) in diesel fuel, 15.6% (37.5% y/y) in natural gas liquids, and 0.4% (2.1% y/y) in residential natural gas. In contrast, prices for residential electric power, the only declining category, fell 0.2% (+4.0% y/y) in May following two successive m/m gains.

Food prices rose 0.6% (2.6% y/y) in May, the third m/m rise in four months, after a 0.2% increase in April (unrevised) and a 0.6% decline in March (unrevised). Food prices for exports (1.8%; 4.8% y/y) and finished consumer foods (0.4%; 2.2% y/y) increased m/m in May, while prices for government purchased foods (-0.1%; +3.4% y/y) dipped m/m following five straight monthly rises.

The PPI for final demand goods climbed 2.8% (10.4% y/y) in May, the fourth consecutive m/m increase and the biggest on record, following a 1.9% rise in April (+2.0% initially). The PPI for final demand goods less food & energy rose 0.8% (5.1% y/y) in May after a 0.7% rise in April—marking the largest m/m gain since April 2022 and continuing its string of m/m increases since August 2023. Prices for final demand finished goods less food & energy rose 0.3% (3.7% y/y) after a 0.4% April rise. Finished consumer goods prices less food & energy grew 0.3% (3.5% y/y) in May after a 0.4% advance in April, with durable consumer goods prices up 0.3% (3.3% y/y) and core nondurable consumer goods prices up 0.3% (3.7% y/y). Prices for private capital equipment increased 0.3% (3.9% y/y) for the third successive month in May. Prices for government purchased goods excluding foods & energy rose 1.0% (5.6% y/y), extending m/m gains since November 2024.

Prices for final demand services grew 0.3% (4.9% y/y) in May, the ninth straight m/m rise, following increases of 0.7% in April (+1.2% initially) and 0.2% in March (unrevised). Trade services prices fell 1.1% (+4.1% y/y), the first m/m fall since February, after a 1.3% April increase. Services prices of transportation & warehousing rose 2.6% (14.2% y/y) in May, the seventh consecutive m/m rise, while services prices less trade, transportation & warehousing increased 0.7% (4.2% y/y), the fourth m/m gain in five months.

Prices for final demand construction rebounded 0.2% (3.5% y/y) in May, up for the fourth time in five months, following a 0.1% easing in April (unrevised). Construction prices for private capital investment edged up 0.1% (3.4% y/y) in May, the fourth m/m increase in five months; construction prices for government rose 0.2% (3.7% y/y) after a flat April reading.

Meanwhile, prices for intermediate demand processed goods climbed 3.5% (13.3% y/y) in May, the strongest of seven straight m/m increases and the largest since March 2021, on top of a 2.7% rise in April (unrevised), led by a 10.4% jump (43.6% y/y) in intermediate demand processed fuel & lubricant costs.

The PPI data are published by the Bureau of Labor Statistics and can be found in Haver’s **USECON** database. Further detail is contained in **PPI** and **PPIR**. The expectations figures are available in the **AS1REPNA** database.

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- May PPI +1.1% m/m (+6.5% y/y, highest since Nov. ’22), driven by a record 10.7% rise in energy and 0.6% in food prices.
- PPI ex foods & energy +0.4% (+4.9% y/y); services +0.3% (+4.9% y/y); construction +0.2% (+3.5% y/y).
- Core goods prices +0.8% (+5.1% y/y), largest m/m increase since Apr. ’22.
- Intermediate demand processed goods prices +3.5% (+13.3% y/y), strongest m/m gain since Mar. ’21.

U.S. Producer Prices Advance in May Led by Energy

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance rose 4,000 to 229,000 in the week ending June 6, from an unrevised level of 225,000 in the week ending May 30. This is the highest level since the February 7 week. The four-week average rose to 219,000 in the June 6 week from 214,750 in the week ending May 30, also unrevised. The Action Economics/Haver Analytics Survey looked for 220,000 claims to have been filed. 

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—rose by 24,000 to 1.795 million in the week ending May 30, from 1.771 million in the week ending May 23, revised from 1.777 million. The four-week moving average rose to 1.780 million in the May 30 week from 1.776 million, revised from 1.777 million in the May 23 week. The insured unemployment rate was unchanged at 1.2% in the week of May 30. Except for a one-week dip to 1.1% in the week of April 25, the insured unemployment rate has been at 1.2% since the week of November 29, 2025.

The insured unemployment rate varied greatly across individual states and territories. In the week ending May 23, the highest unemployment rates were in New Jersey (2.07%) and Washington (2.03%). The lowest rates were in South Dakota (0.27%), Florida (0.32%), Louisiana (0.34%), Alabama (0.39%), North Carolina (0.40%), Arkansas (0.42%), Tennessee (0.47%), Kentucky and Virginia (both 0.49%). Rates in other notable states include California (1.84%), New York (1.56%), Illinois (1.41%), Pennsylvania (1.28%), and Texas (1.05%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986.

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- New claims rose by 4,000 to 229,000 in the week ending June 6.
- Continuing claims rose by 24,000 to 1.795 million.
- The insured unemployment rate was unchanged at 1.2% in the week of May 30.

U.S. Initial Unemployment Claims Rose in the Week of June 6

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Channeling ‘The Who,’ the ECB implemented its _'We Won’t Get Fooled Again'_ rate hike. During COVID, inflation spiked around the world as central bankers were late with rate hikes. Arguably, too many of them followed the lead of the U.S. Federal Reserve. The ECB leaned against that by hiking its key deposit rate by 25bp today.

Both the chart and the table show how inflation has recently soared sharply in the countries of the European Monetary Union. However, the price gains are concentrated in the headlines and driven by oil prices. Still, oil price gains this large and persistent—and potentially long-lasting—will permeate the pricing of most goods since there will be knock-on effects through transportation costs. The ECB has therefore taken a step to keep in line with the increase in energy prices.

If there are further impacts from energy prices, the ECB has the door open to move again. But if price pressures wane, the ECB will be under no pressure to act again.

For now, we can see that headline inflation across the European economic area is generally accelerating strongly and somewhat uniformly. The three-month annualized HICP rose at a 6.3% annual rate. With three-month inflation among these 11 long-lived EMU members, the highest three-month pace is 13.5% in Luxembourg. Germany has the lowest inflation over three months, at a 4% pace.

The 12-month inflation pace is better contained, of course, with a top gain of 4.5% in Greece compared to the slowest pace at 2.5% in France and Germany. Over three months and 12 months, headline inflation shows deceleration occurring in none of these countries on these two timelines. So, the ECB action is timely.

The median gain for the group over three months is 6.5%, close to the overall EMU weighted result. The 12-month median is at 3.2%, also close to the 12-month EMU pace.

By comparison, I calculate the median for the core at 2.2% over three months and 2.0% over 12 months—right on the ECB’s inflation objective. Core inflation is never the central bank’s target, but it does strip out the volatility. So, we can understand the ECB’s move as an effort to keep up with what might be a changed trend. And if it is not a changed trend, then the ECB can peel its rate hike back. But for now, it is going to stay close to the short-term impact on the inflation rate to be sure that it will control inflation developments in the future. This is a good way to not repeat past mistakes.

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Europe

EMU Inflation and An ECB Rate Hike

**US Outperformance Holds; Europe and China Continue to Disappoint**
One of the most persistent features of the global macro landscape in 2026 has been the widening divergence between growth outcomes in the United States and those in Europe and China. Citigroup’s global growth surprise indices—which measure the gap between actual economic releases and consensus expectations—capture this divergence with unusual clarity. US data have continued to surprise on the upside, supported by resilient consumer spending, a stronger-than-expected labour market and the ongoing AI-driven capital spending boom. The picture elsewhere is less encouraging. Growth surprises have turned negative across the euro area, reflecting the cumulative toll of elevated energy costs, weak industrial activity and subdued business confidence. And China's growth surprise index has also fallen sharply in recent weeks, with weaker-than-expected retail sales and fixed asset investment data for May this week reinforcing concerns that domestic demand remains fragile and that policy support is yet to gain meaningful traction.

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**The Oil Risk Premium in the UK Has Been Fading**
One of the more notable features of UK markets this year has been the close relationship between oil prices and two-year gilt yields. The link is not mechanical, but in an economy heavily exposed to imported energy, swings in oil prices can materially alter the inflation outlook and, by extension, expectations for Bank of England policy. That relationship was on display again this week. A softer-than-expected UK CPI reading for May—helped in part by easing energy price pressures—led investors to scale back expectations that inflation would remain persistently above target, pushing two-year gilt yields to their lowest level in six weeks. The question now is whether this marks the start of a more sustained easing in inflation pressures or merely a temporary reprieve. Much will depend on whether the recent decline in oil prices following the US-Iran ceasefire agreement proves durable.

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**The AI Investment Boom Is Rewriting the Rule Book for the Chip Industry**
If the divergence in global growth surprises noted above tells a story of a world economy under strain, the semiconductor sales data tell a very different one — of a technology-driven investment cycle that is accelerating almost regardless of the broader macro environment. Global semiconductor sales have surged to record levels over the past twelve months, driven primarily by insatiable demand for the chips that underpin AI infrastructure: graphics processing units, high-bandwidth memory, and advanced logic chips. Data centre capital expenditure from the hyperscalers continues to exceed even the most optimistic forecasts from a year ago, and the investment pipeline shows no sign of moderating. The gains are concentrated in AI-adjacent products; legacy chips for consumer electronics and industrial applications remain relatively soft.

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**Copper Holds Firm As Oil Retreats**
The commodity markets are telling two quite different stories this week, and the contrast is instructive. Oil has moved sharply lower on the US-Iran MoU news as investors trim the conflict risk premium that has been embedded in energy markets since March — a welcome development for inflation and central bank optionality alike. But the three commodities shown in this chart tell a different story. Copper, one of the most reliable proxies for global electricity infrastructure investment, remains near multi-year highs, reflecting the extraordinary volume of data centre construction, grid expansion and electrification spending flowing through the global economy. Aluminium — energy-intensive to produce and increasingly in demand for the structural components of both data centres and electric vehicles — has, until quite recently, held its ground. Lithium hydroxide, the battery-grade refining product that sits at the heart of the energy storage supply chain, has seen some cyclical softness but remains structurally underpinned by the scale of demand being projected for grid-scale storage and electric mobility over the next decade.

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**Is Energy Availability a Binding Constraint on Growth?**
This next chart is a scatter plot that maps electricity generation per capita against GDP growth per capita across a broad sample of countries over the past five years. The positive relationship is striking. Economies with higher electricity generation per capita, including the United States, have generally delivered stronger GDP growth, while those with more constrained electricity systems have tended to lag. The obvious objection is reverse causality: richer economies generate more electricity because they have more to power. That is partly true. But the broader evidence is difficult to dismiss. The US shale revolution delivered an abundance of cheap energy that supported a sustained period of industrial outperformance relative to many advanced economies. Mainstream commentary often attributed this advantage to factors such as labour market flexibility or technological innovation, but energy costs were arguably at least as important.

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**Corporate America Is Investing from a Position of Unusual Financial Strength**
The surge in US corporate investment—particularly in AI infrastructure, data centres and semiconductors—has inevitably drawn comparisons with the late-1990s dot-com boom. Yet the financial balance data suggest an important difference. During the dot-com era, US non-financial corporates moved into a financial deficit approaching 4% of GDP, relying heavily on external financing to fund investment. Today, despite another ambitious investment cycle, the sector remains in surplus, currently around 1.8% of GDP. Corporate America is investing aggressively, but it is still generating more cash than it is spending. The boom is being financed largely through profits rather than debt. Risks remain—not least the growing fiscal burden on the federal government—but the balance-sheet fragilities that turned previous investment booms into systemic crises appear far less pronounced. If a major constraint emerges in the years ahead, it may be energy and resources rather than leverage.

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The signing of a Memorandum of Understanding (MoU) between the United States and Iran earlier this week has offered financial markets their most significant moment of geopolitical relief since the Middle East conflict escalated in early March. Oil prices fell sharply on the news, short-dated bond yields moved lower across several major economies, and risk assets recovered ground. But relief, as investors have learnt repeatedly over the past three months, is arguably not the same as resolution. The MoU sets a framework for negotiations rather than a final settlement, and the history of US-Iran diplomacy is not one that encourages complacency. Meanwhile, the Federal Reserve — concluding its June meeting yesterday under new chair Kevin Warsh — held rates steady but delivered a distinctly hawkish dot plot that shifted the median year-end projection from a cut to a hike, a reminder that the easing cycle the market had been pricing is no longer the base case. Against this backdrop, this week's charts take stock of where the global economy presently stands — and what the underlying data, beneath the geopolitical noise, are telling us. The picture that emerges is one of divergence. The United States continues to outperform consensus growth expectations while Europe and China disappoint (chart 1). UK short-dated yields have tracked oil prices with unusual consistency this year, and today's softer-than-expected CPI print for May — arriving just as the MoU has knocked crude lower — potentially changes the policy calculus for the Bank of England (chart 2). Global semiconductor sales, meanwhile, are storming ahead regardless of the geopolitical noise, powered by AI infrastructure spending that shows no sign of fatigue (chart 3). A cross-section of commodity prices tells two stories simultaneously: the geopolitical risk premium is draining out of oil, but the metals and materials the AI economy actually needs — copper, uranium, critical minerals — are holding firm (chart 4). Meanwhile a cross-country scatter of electricity generation and GDP growth over the past five years raises a question that deserves more attention than it typically gets: is energy availability a constraint on growth, or merely a consequence of it? The evidence, we would argue, points firmly in one direction (chart 5). And finally, for all the comparisons being drawn between the current investment boom and the late 1990s, the financial balance of the US corporate sector tells a rather different story — one that matters for how any correction might unfold (chart 6).

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Charts of the Week: Between Relief and Reality

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