AAIG's Macro Pulse #10
Written by Jochem Verzijl
Welcome to this tenth edition of AAIG's Macro Pulse. Last week the inflation data confirmed what the energy market had been warning about for weeks, the Iran deal fell back into stalemate after Trump rejected Iran's counter-proposal, and Kevin Warsh formally took over as Fed chair into one of the most difficult monetary policy environments in years. Let's dive in!
1) KEY METRICS / DATA POINTS
Tuesday’s April CPI was the most important domestic data point of the week. Headline inflation rose to 3.8% annually, up from 3.3% in March, the highest reading since May 2023. On a monthly basis prices rose 0.6%, with energy accounting for over 40% of that gain. Energy is now up 17.9% over the year, food rose 0.5% on the month, and airline fares are up 20.7% over the past twelve months as jet fuel costs pass directly through to ticket prices.
The number that matters most, however, is core CPI. If we strip out food and energy we see prices still rose 0.4% on the month and 2.8% annually. The monthly reading came in above the 0.3% consensus and is the highest since January 2025. This is the signal worth paying attention to, because it means inflation is no longer contained within the energy shock. Shelter accelerated, apparel picked up, and services inflation broadened. The war started this, but what we see is that the price pressure is now moving through the wider economy under its own momentum.
Alongside that, real wages turned negative for the first time since April 2023. Annual wage growth of 3.6% is now running below the 3.8% inflation rate. For two years, workers had a buffer as pay outpaced prices. That buffer becomes smaller, and the squeeze on household purchasing power is now a real and measurable phenomenon.
Wednesday’s PPI release reinforced the same message from the supply side. Producer prices rose 1.4% on the month against a 0.5% consensus, and 6% annually, the largest annual gain since December 2022. Core PPI rose 1.0% on the month against a 0.4% estimate. Services producer prices jumped 1.2%, with two thirds of that move coming from trade services, a sign that tariff costs are beginning to layer on top of energy costs. The PPI matters here because it is a leading indicator of where consumer prices go next. Businesses are absorbing cost increases that have not yet been passed on. Some of that will probably show up in the May and June CPI report.
On the diplomatic front, the week opened negative. Trump rejected Iran’s counter-proposal to the 14-point framework on Sunday, calling it “totally unacceptable.” Iran had proposed a 5-year moratorium on uranium enrichment. The US had asked for 20 years. Iran’s proposal also demanded US force withdrawals from the region, a condition Washington has not engaged with. Trump declared the ceasefire was on “massive life support” and Brent moved back above $104 on Monday as deal optimism unwound (still trading at that level).
By mid-week the tone shifted. Trump sent Iran a fresh nuclear proposal on Friday May 16 and his advisors signalled the administration wants a deal before the midterm elections in November. Iran’s Khamenei advisor Shamkhani said Tehran was ready to sign a nuclear deal in exchange for the swift removal of financial sanctions, while simultaneously criticising Washington’s posture. Iran’s foreign ministry then contradicted this, denying receipt of a new proposal and reiterating that enrichment rights were non-negotiable. That gap between the advisor’s openness and the ministry’s denial reflects the same internal division we have tracked throughout this conflict and written about before, and it is not a minor communications issue. It reflects a genuine split between those in Tehran who want economic relief and those, primarily the IRGC, who view the nuclear programme as untouchable.
Kevin Warsh was confirmed as Fed chair by the Senate on May 13 in a 54 to 45 vote, the closest confirmation in the modern era, and formally took over from Powell on May 15. His first FOMC meeting is June 16 to 17.
2) AAIG’S PERSPECTIVE
The CPI and PPI taken together tell a story that is more concerning than either number in isolation. The headline CPI acceleration was expected, like written about in our previous Macro Pulses. However, what was not fully priced was the breadth of the core move. When shelter, apparel, and services all accelerate in the same month, it means the energy shock has stopped being a contained event and is feeding into the underlying structure of prices more broadly. The PPI data adds a further layer: a 1% monthly core PPI gain means businesses are still sitting on cost increases they have not yet passed to consumers. This points toward continued upward pressure in May and June data even if oil prices stabilise where they are today.
The turn in real wages is the consumer dynamic that deserves the most attention, because it is where the macroeconomic story connects most directly to actual behaviour. Consumer spending has held up through this period, but it has increasingly been carried by higher-income households and credit. As purchasing power erodes for middle and lower-income earners, that spending base narrows. This is precisely the mechanism through which an energy shock becomes a broader consumption slowdown, and the April data suggests that process has started rather than is approaching.
On the deal, the gap between 5 years and 20 years on the enrichment moratorium reflects a fundamental disagreement about the purpose of the agreement. The US wants a framework that keeps Iran non-nuclear for long enough to outlast any near-term political changes in Tehran. Iran wants something short enough that it retains the option to resume enrichment within a politically defensible window. Those are structurally different objectives, and they probably do not resolve easily at a midpoint. The reported 12-year figure in earlier rounds was a US estimate of where Iran might be moved to, and not an Iranian offer. Iran opened at 5. The distance between those two numbers remains wide, and the nuclear question remains the same structural obstacle it has been since February 28.
Warsh’s arrival changes the institutional dynamics of the committee more than the near-term rate path, which remains a hold through at least June. He inherits a committee with four dissents at the last meeting, inflation at 3.8% and broadening, and a market pricing essentially zero probability of a cut this year with roughly 39% odds of a hike. His first decision will likely be a communication decision: how to frame the June statement in a way that is honest about the inflation picture without triggering an unnecessary market reaction. If he removes the easing bias at June’s meeting while holding rates, it would be the most significant hawkish signal from the Fed since the hiking cycle. A rate hike in 2026 is not our base case, but the data released this week makes it a scenario that requires active monitoring rather than total dismissal.
3) WHAT TO WATCH
Three things will shape the next two weeks, and they are tightly connected.
The first is Iran’s response to Trump’s May 16 proposal. The enrichment moratorium duration is the specific number to watch. If Iran moves meaningfully above 5 years, the talks have momentum. If the response reiterates 5 years or adds new conditions around US force withdrawals, the framework stalls again and oil moves higher. Araghchi’s travel schedule will be the early signal: movement toward Islamabad or Oman means engagement, movement toward Beijing or Moscow means Iran is positioning for a longer standoff and consulting its backers rather than its mediators.
The second is whether core inflation continues to broaden into the May data. The next hard print is the June 10 CPI release, but ahead of that the University of Michigan inflation expectations survey and any public commentary from the three hawkish FOMC dissenters, Hammack, Kashkari, and Logan, will indicate whether the committee’s internal pressure toward removing the easing bias is growing. If long-run consumer inflation expectations move materially above 3%, the Fed loses the argument that this is a temporary energy-driven episode, and the June statement becomes significantly harder to hold in its current form.
The third is Warsh’s June 16 to 17 meeting, which is a projections meeting. The updated dot plot will show where the committee collectively sees rates through 2026 and into 2027. If the median dot eliminates the one projected cut for the year, the market reaction will be immediate. That outcome depends heavily on whether the diplomatic picture improves enough over the next four weeks to bring oil materially lower before the June data window closes. Right now, with Brent above $100 and core inflation broadening, that window is narrowing faster than markets appear to be pricing.
The connecting thread has not changed: the inflation trajectory, the Fed’s room to act, and the consumer’s purchasing power all run through oil, and oil runs through the strait. What is different this week is that inflation has crossed a threshold. It is no longer solely a story about energy prices as it has affected the broader price level, and that makes it harder to resolve even if a deal is reached tomorrow. The second-order effects, services, shelter, food transport, are now in motion, and those take months to unwind even under the most optimistic scenario for the strait.
Thanks for reading this tenth pulse, and see you at the next one!
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