Yesterday’s US data dump:

• Real GDP was revised up 0.5 percentage point from the second estimate, primarily reflecting a downward revision to imports, which are a subtraction in the calculation of GDP, that was partly offset by a downward revision to consumer spending.
• Real final sales to private domestic purchasers, the sum of consumer spending and gross private fixed investment, increased 1.7 percent in the first quarter, revised down 0.7 percentage point from the previous estimate.
• The personal consumption expenditures (PCE) price index increased 4.6 percent, also revised up 0.1 percentage point, and the PCE price index excluding food and energy increased 4.4 percent, the same as previously estimated.

• Real consumer spending rose 2.1% YoY in May. Real disposable income posted its first monthly gain in 5 months and has been basically flat for the past year. May’s saving rate held at 3.0%. May is the last month for tax rebates which were up 11% YoY at slightly more than $3k.

• Headline PCED inflation surged to 4.1% Y0Y in May. Core PCED also spiked to 3.4%, its highest since October 2023.
• Goods inflation was 4.8%, led by a 5.6% increase in nondurable goods. Durable goods inflation was 3.3%, suggesting that the effect of last year’s tariff hikes hasn’t fully abated yet.

• Services excluding energy and housing inflation rose to 3.9% YoY. This “supercore” inflation rate is a key measure of underlying inflation.

This next chart plots nominal expenditures on goods with retail sales which both spiked up since March. The black line is real expenditures on goods, flat since March, proof that all of the spending “boom” was inflation.

Spending on services keeps rising 5.5-6.0% YoY but supercore inflation is now 4.0% YoY from 3.0% one year ago. Real Services are now growing 2.0% YoY, at the low end of its recent range.

• Oil Prices Make a Stunning Retreat to Prewar Levels. Where Do We Go From Here?

(…) A few weeks ago, energy experts predicted that a reopening of the strait would be a protracted process that would involve navigating a literal minefield; that some Persian Gulf countries could take months to resume production; and that dwindling oil inventories around the globe would inevitably spur a surge in fuel prices.

Now, markets are retreating in spectacular fashion, baffling executives and analysts. (…)

Analysts at JPMorgan Chase said this week that global energy flows had shifted in ways they hadn’t expected.

“The market has rebalanced through a meaningfully different mix of demand losses and inventory withdrawals than we initially assumed,” they said. 

The reprieve could be short-lived. Some oil analysts are warning that the sinking prices don’t fully reflect how tight the market remains after months of draws on global oil inventories, which are now flirting with operational limits.

Although tankers are making it out of the strait, the voyage to unload crude at their destinations and back to pick up another load can take months. Plus, production in the gulf likely might not hit its prewar levels before this fall.

“The market might be a little bit overenthusiastic of how quickly the supply side, particularly inventories, are going to stabilize,” said Bart Melek, global head of commodity strategy at TD Securities. (…)

A postwar record of 78 tankers sailed through the waterway on Wednesday, up from a previous high of 49, according to S&P Global. That represents 57% of prewar traffic levels. (…)

“I think it’s going to be pretty tenuous,” said Mark Lashier, chief executive of Phillips 66, at a conference this week, adding that some 90 million to 100 million barrels of oil can sail out of the strait after being stuck for some time. “Then the question is: Who will be brave enough to send ships back in? Will they be able to get insurance? How does that all play out?” (…)

Whether China picks up new purchases in the coming weeks will have a huge influence on the markets. Analysts said the country might not want to reduce its strategic reserves further. (…)

Over the past three weeks, roughly 2 million barrels of oil a day has come back on to the market, with Iran pumping out barrels faster than Saudi Arabia and the U.A.E., according to the research firm Rystad Energy. But it will likely take until October for Iraq, Kuwait and other gulf countries that had to slash production to pump oil at full speed, analysts said. (…)

Some oil executives and analysts said oil prices will bounce back.

National oil companies are aggressively marking down prices for crude as buyers move slowly back into the market, said Robert Yawger, an analyst at Mizuho. As headlines on Iran recede, traders will be forced to trade oil based on fundamental supply and demand again, he said.

“It’s set up for a bullish ride here,” Yawger said, adding that prices could swing back up to the $80 a barrel range in coming weeks. “By definition, it’s oversold.”

Economists Lift US Core Inflation Forecasts, See Fed on Hold

Economists raised their forecasts for a key gauge of US inflation this year and boosted estimates for job creation, scrapping the chance of a Federal Reserve interest-rate cut until well into 2027.

The so-called core personal consumption expenditures price index, which excludes food and energy, is now expected to rise 3.2% in the fourth quarter from a year earlier, according to a Bloomberg News survey of economists. Estimates for overall inflation were little changed at 3.5%.

Forecasters also lowered their unemployment rate projections through the rest of the year and marked up their estimates for job growth, following a run of stronger-than-expected employment gains. That’s likely to keep Fed officials focused on taming inflation.

While the median estimate in Bloomberg’s survey indicates the Fed will remain on hold until they cut rates in June 2027, some economists — and policymakers — expect the central bank to raise borrowing costs before year end.

Respondents marked up their forecasts for gross domestic product in the second quarter, though GDP is still seen rising 2.1% on average in 2026.

The Bloomberg survey of 86 economists was conducted June 19-24, following Kevin Warsh’s first press conference as Fed chairman.

Fed’s Williams: Current Monetary Policy Stance Well Positioned to Restore Inflation to 2% John Williams says he expects inflation readings to edge down in the coming quarters, although substantial risks remain

(…) The artificial intelligence investment boom, he said, may push up prices more than expected, and global supply disruptions stemming from the conflict in the Middle East remain a source of risk to both the growth and inflation outlooks. The AI build-out creates an uncertain scenario for officials as they balance the risks between waiting for a larger productivity payoff or addressing any inflation pressures it may create in the short-term.

Williams said the rise in inflation primarily reflects three drivers: the effects of increased tariffs on imported goods, higher energy and commodity prices owing to the conflict in the Middle East, and robust demand for certain categories of technology goods related to the AI investment boom.

The Fed’s preferred inflation gauge rose by 4.1% Thursday, its highest year-over-year reading since April 2023, more than double the preferred target rate for the central bank.

With regard to employment, Williams said the labor market has proven resilient, and medium-term inflation expectations remained well anchored through May.

Trump Touts $11.1 Billion Aid Request to Woo Struggling Farmers

The appeal to Congress is part of a supplemental funding package that includes defense spending. It seeks $10 billion in assistance for growers of crops such as corn, soybeans and rice, along with $1.1 billion for Florida producers affected by winter storms late in 2025 and earlier in 2026. (…)

Late Thursday, the White House released an executive order that aims to bolster regenerative agriculture, and at the dinner, Trump promised that Iran’s rebuilding after the war could be a boon for American farmers.

“The Islamic Republic of Iran, they’re having a hard time with food, and we’re going to be taking some of their money, and we’ll spend it, and we’re going to be buying wheat and soybeans,” Trump said at a Rose Garden dinner.

“That process is going to be starting pretty soon. It’s going to be pretty big too. I think it’s going to be very big.”

It all comes as the Iran war resulted in soaring costs for fuel and fertilizer, further squeezing farmers already dealing with Trump’s tariff regime that crimped US crop exports to the world’s top buyer China and also raised prices for imported raw materials.

The new aid request follows a separate $12 billion package, first announced in December, that started paying out earlier this year. Taken together, the two packages would be roughly equal to the $23 billion in payments to farms for losses linked to international trade disruptions during Trump’s first term. (…)

Steffen said a much broader approach is needed to solve the challenges producers are up against. “We need a trade policy that’s coherent, that’s consistent,” he said. (…)

Volkswagen to axe up to 100,000 jobs in sweeping cost-cutting drive Restructuring would remove close to one in six workers and rank among biggest corporate lay-offs of all time

Volkswagen plans to cut up to 100,000 jobs and end production at four plants in Germany in a significant acceleration of its cost-cutting plans as Europe’s largest carmaker seeks to counter the rapid advance of Chinese rivals.

The cull would mean the removal of close to one in six of the company’s roughly 625,000 roles worldwide, making it one of the biggest ever job-cutting programmes. (…)

“Should such plans be pursued, we would oppose them with all our might,” said the head of VW’s works council Daniela Cavallo, the president of union IG Metall Christiane Benner and Lower Saxony union boss Thorsten Groeger in a statement.

The Data-Center Boom Is Sparking a Third Wave of Inflation Demand for memory chips is pushing prices higher. Will AI’s promise of increased productivity come in time to temper that inflation?

(…) The data centers used for AI require sophisticated computing equipment, cooling systems to keep that equipment from overheating, electric and fiber-optic cables and backup generators to prevent power disruptions. Based on announced and planned developments, Van Nieuwerburgh estimates that spending on the AI build-out through 2032 could come to about $8 trillion—nearly five times the market value of the entire New York City property market.

With so much demand, prices are rising for many of the things that go into the AI build-out. And because those things are used for more than just AI, those price increases are spilling over into the broader economy.

Memory and storage chips, for example, are used in a broad array of consumer-electronics products that includes everything from videogame consoles to cars. Nintendo, Microsoft and Sony have all raised prices on devices. Higher price tags are coming to Apple products, too, according to Chief Executive Tim Cook, who told The Wall Street Journal that the jump in costs was unlike anything he had seen “in any area in over 40 years.”

If AI is as revolutionary as many economists predict, it could eventually cool inflation. That is the lesson from past technological revolutions, which boosted workers’ productivity, making it easier for businesses to meet demand without raising prices. Kevin Warsh, now the Federal Reserve chairman, has previously made that case. (…)

Even under an accelerated timeline, economists at UBS reckon it will be at least a couple of years before AI would start helping to lower inflation. (…)

Already, this is beginning to show up in the inflation data. Consumer prices for computer software and accessories were up about 15% from a year earlier in May, according to the Labor Department. There could be more price increases in the pipeline: The Labor Department’s measure of wholesale electronic components and accessories was up 27% from a year earlier last month. (…)

AI is a shock to demand that could persist for years. (…)

In some instances, the AI build-out could also add to labor costs. Wages for workers who are in demand from data-center construction have been picking up: Average hourly earnings for electrical and wiring-installation contractors were up 6.5% in April from a year earlier, which compared with 3.6% for all private-sector workers. (…)

Earlier this year, Goldman Sachs economists forecast that data centers will account for nearly half of U.S. growth in power demand through 2030. As a result, they saw consumer electricity prices rising about 6% annually this year and next.

To be sure, economists don’t foresee the AI build-out fueling anything like the inflation surge the U.S. experienced when the economy reopened following the Covid-19 crisis. Items like smartphones and videogames represent just a tiny fraction of what people spend every year. Even electricity accounts for only about 2.5% of consumer spending, according to the Labor Department.

Instead, it could serve to keep inflation broadly elevated. Economists expect the May reading of the Fed’s preferred measure of inflation, due out from the Commerce Department on Thursday, will show prices were 4.1% higher than a year earlier. The central bank aims to get inflation to 2%—a level not seen in over five years, as a series of temporary-seeming factors pushed prices higher.

“The more these things happen, the more likely it is that people think, ‘Hey, this is a pattern, maybe I shouldn’t expect inflation to come back down,’” said Jón Steinsson, an economist at the University of California, Berkeley.

That is only one inflation story this year. Add the broad demand pressures stemming from

• the US-Iran war pushing governments and companies to hoard resources and inventories to secure supply “just-in-case”.
• worldwide increases in military spending as governments have realized the need for self-defense.

Importantly, these are all urgent spending that are largely price insensitive.

This Yardeni chart (my rectangles) illustrates the ratcheting up in prices for a large set of commodities used in manufacturing …

… translated into sharply higher producer prices (which exclude tariffs) …

… quickly finding their ways into consumer prices …

… compounded by rising import prices (be mindful of the scale, now 5-10%) …

… which have also been ratcheting up significantly. Could we be in a true regime change?

Thankfully, wages are not adding to inflation so far, nor are they subtracting from inflation still in the +3.5% range:

Purchasing managers, in a clear cost-push situation, are easily pushing their output prices up 4.5%. The composite includes both goods and services.

Yesterday, the Richmond Fed released its quarterly CFO Survey which includes firms that range from small operations to Fortune 500 companies across all major industries. Respondents include chief financial officers, owner-operators, vice presidents and directors of finance, accountants, controllers, treasurers, and others with financial decision-making roles.

Financial decision-makers’ outlooks worsened this quarter amid heightened concern over rising costs and prices in the second quarter of 2026. Since the last survey, CFOs added 1.1 percentage points to their firm’s unit cost and price growth projections for 2026.

AI Demand Begins to Justify Massive Cost of Data-Center Buildout

(…) Global AI sales, excluding China, reached $25 billion in the first quarter of 2026, exceeding the industry’s estimated $21 billion in depreciation costs tied to investments in data centers and chips for the second consecutive quarter.

While the milestone suggests that AI companies are beginning to cover the cost of their capital spending, the margins are thin. Depreciation charges still consume more than two thirds of revenue, leaving a small buffer to cover other costs such as power, labor and financing. (…)

Much of the AI boom has been measured from the supply side, through disclosures from public semiconductor companies like Nvidia Corp. and hyperscalers like Alphabet. Demand has been harder to quantify because many of the most important AI labs, including OpenAI and Anthropic, remain private.

Generative AI revenue, excluding China, reached $110 billion over the past 12 months and is scaling three times faster than any previous information technology wave including the internet, mobile applications and the cloud, according to the report.

The figures are based on a dataset that Exponential View built tracking AI spending across more than 1,000 companies. They used sources including company filings, executive statements, press reporting and cloud-provider disclosures, and then adjusted the figures to avoid double-counting between layers of the AI supply chain.

The analysis assumes a six-year depreciation life for IT equipment including graphics processing units, or GPUs, the chips used to train and run advanced AI models. Some investors argue this is optimistic given the rapid pace of chip innovation, which can render older hardware less valuable within a few years.

If GPUs lose economic value faster than assumed, companies could face higher depreciation charges, asset writedowns or earlier replacement costs. Michael Burry, the investor known for betting against the US housing market before the 2008 financial crisis, has described understated depreciation as “one of the most common frauds of the modern era.”

However, data in the report suggests older chip models are not collapsing in value. The rental price for an hour of access to Nvidia’s H100 chip remains almost 80% of its launch level. “Even into its fourth year, it is completely in demand,” Azhar said, noting it’s become more expensive over the last year, as demand for AI compute outstripped supply of Nvidia’s new Blackwell chips.

That chimes with comments from Matt Garman, the chief executive officer of Amazon Web Services, who said in February the company had not retired six-year-old Nvidia A100 servers due to continuing demand.

The report also shows more users are moving toward open-weight and Chinese AI models such as DeepSeek. Data from OpenRouter, a platform that gives developers access to multiple AI models, shows the share of tokens requested from Google, OpenAI and Anthropic models fell to 33% in June 2026 from 72% a year earlier.

Azhar said that reflects power users moving toward cheaper and faster models for simpler tasks. (…)

That does not necessarily spell trouble for leading foundation-model companies, he added, but it raises the bar for charging higher prices. They will need to compete with “additional services, with more lock-in, and with all of the things that allow you to charge a premium,” he said.

• Micron Delivers the AI Reassurance Wall Street Was Craving

The US memory-chip maker released a quarterly sales forecast that crushed estimates, signaling its growth run remains strong. The results should help rebuild investor confidence following a tech selloff sparked by worries over AI.

How good was the report? Very.

• Revenue will be roughly $50 billion in the fiscal fourth quarter. Analysts had estimated $43.2 billion.
• Profit will be about $31 a share, compared with a projection of $25.31.
• Third-quarter earnings increased to $25.11 a share. A year ago, they were $1.91.
• Adjusted gross margin more than doubled.

Perhaps most importantly, Micron said it has secured 16 strategic customer agreements, which average three years in length. That suggests it can mitigate the boom-and-bust cycles that have plagued the memory-chip industry.

China Issues New Energy Plan at Transition Inflection Point

China published a five-year plan for building a new energy system, aiming to map out a way forward for a sector that’s starting to run up against the constraints of its rapid pivot toward clean electricity.

Every half-decade, Chinese leaders publish a five-year plan outlining economic and societal goals, and then follow it up with several sectoral schemes with more detailed targets and strategies. This year, the broader plan came out in March, and sectoral plans have begun trickling out in recent weeks, including ones on jobs and urban renewal. (…)

It called for China to peak its coal and oil during the 2026-30 period, double non-fossil fuel energy over the next decade, and focus on developing technologies like hydrogen and nuclear fusion. It also sought to make progress on a major gas pipeline from Russia, and boost capacity of generating technologies like nuclear, offshore wind and pumped hydro storage. (…)