Hot CPI, cooler context

Dave Harrison Smith, CFA
Chief Investment Officer
May 19, 2026

The pain of the post-pandemic surge of inflation remains fresh in investors’ minds. What was initially expected to be a transitory shock persisted far longer than many economists had estimated and eventually forced one of the most aggressive monetary-tightening cycles in more than 50 years. This, combined with the historical tendency for bouts of inflation to be followed by secondary or repeat waves, has left investors anxiously awaiting signs that the global energy crisis is beginning to seep into prices more broadly.

April’s inflation data came in hot and did little to quell concerns. Headline CPI rose 3.8% over last year, accelerating sharply for the second consecutive month. Core CPI, which excludes volatile food and energy prices, also came in above expectations, rising 2.8% from last year. On a monthly basis, headline CPI slowed to 0.6%, with the pace moderating modestly as energy price increases eased after a massive uptick in March. More concerning, however, was that monthly core CPI accelerated to 0.4%, a marked increase from March.

Headline and Core inflation remain elevated (2017-2026)

What drove the surprise

The headline numbers are challenging to digest, but the news may not be as bad as at first blush. A meaningful portion of the price increase was due to technical factors tied to shelter inflation. Due to the government shutdown last October, the Bureau of Labor Statistics did not collect semiannual rent-level data for a cohort and instead carried forward the previous month’s stale data. April’s report laps that temporary data, creating an artificial jump in shelter prices. Given shelter’s large weight in the CPI basket, the 0.6% monthly jump had a significant impact on overall inflation in April. Prior to this month, shelter prices had been rising at a relatively steady rate in the mid-to-high 2% range, indicating April’s figure was significantly inflated and suggesting that we are likely to return to a more normalized monthly pace in short order.

Select CPI components, month-over-month and 3-month annualized changes

Markets reprice inflation risk

Still, the inflation print was a challenging one for bullish investors. Bond investors were quick to react, with the yield on the US 10-Year note rising to 4.62% on Friday. This represents a 45-basis-point increase since the start of the year (a basis point, “bp”, is 0.01%). Interest rate futures repriced meaningfully, as well, as the market positioning on futures now favors at least one rate hike by year-end. Outgoing Federal Reserve Chair Jerome Powell has consistently emphasized that interest rate tools are less effective against supply-driven inflation shocks such as the current energy crisis. Yet, we know that psychology matters, and that inflation fears tend to become self-reinforcing. The very prominent rise in gas prices may eventually seep into our collective psyche, and the slow creep of broad cost inflation may soon follow.

10-Year US Treasury yield (%) climbs on inflation fears

Duration matters

At the onset of the war in Iran, we admonished that the duration of the conflict would prove as important as the magnitude of the initial shock. The longer the crisis, the more painful the economic implications. We are beginning to see the effects of the conflict’s duration. Global governments have thus far relied on temporary mitigation measures to dull the pain, such as releasing oil from strategic reserves. We are beginning to discover the limits of these measures. Critically, inflation expectations appear to remain anchored despite price inflation beginning to filter into transportation, airline, and grocery prices. For now, at least, the market appears willing to accept that this bout of inflation is supply-driven and temporary. Just don’t call it transitory.

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