Hot US CPI and PPI spark stagflation fears; Fed rate cuts delayed

The May 13 PPI print delivered a shock that resets the near-term macro playbook. US wholesale prices climbed 6% year-over-year, the fastest pace since 2022, driven almost entirely by surging energy costs tied to the Iran conflict disrupting crude supplies through the Strait of Hormuz. This reading arrived just as Fed officials like Susan Collins signaled rates should remain on hold for 'some time,' a tacit acknowledgment that the inflationThe rate at which prices rise across an economy. threat is not yet tamed. The 10-year Treasury yield immediately climbed to its highest since July, breaking through 5% in the long bond for the first time since 2007. This repricing reflects a growing consensus that the Fed pivot anticipated by markets earlier this year is off the table.

The Iran war is now the dominant inflationThe rate at which prices rise across an economy. transmission mechanism. Oil flows through the Strait of Hormuz fell by nearly 6 million barrels per day in Q1 2026, marking a 30% drop. Saudi Arabia's crude output collapsed to the lowest since 1990. Energy importers face immediate margin pressure; Turkey's central bank is already hiking inflation forecasts, Bangladesh faced a credit outlook cut to negative, and firms globally are stockpiling inventory at levels not seen since 2022. Supply chain stress indices hit multi-year highs as procurement managers rush to secure goods before further price acceleration.

Equity breadth is under pressure as growth stocks price in longer durationBond price sensitivity to interest rate changes. of elevated rates. The Nasdaq fell 0.87% on May 13, dragged by mega-cap names like GOOGL, TSLA, and AVGO. Tech and high-valuation names suffer most; defensive sectors and energy stand to benefit. Regional banks face deposit margin compression as the yield curvePlot of bond yields across maturities. steepens, and fixed-income investors are rotating away from equities into the 5%+ long-bond yields now available. Consumer staples are priced to outperform growth, and cyclicals face demand-destruction risk if the Fed tightens further.

Skeptics argue the Iran war is temporary and oil may stabilize. Some point to recent North Sea price discounts as evidence demand fears are overblown. Conversely, if the conflict widens, supply could tighten dramatically, forcing the Fed into a genuine stagflation scenario where inflationThe rate at which prices rise across an economy. remains sticky even as growth slows.