Two datasets released on Thursday by the US Commerce Department and the Bureau of Labor Statistics painted a clearer picture than Wednesday's CPI of how the energy shock is working its way through the American economy.
On the retail side, September retail sales rose 0.8% month over month, above the 0.3% economists expected, while the prior August figure was revised up to 1.3%. Excluding autos and gasoline, sales grew just 0.2%, and the "control group" that strips out food services, auto dealers, building materials stores and gas stations rose only 0.1%, well below the 0.3% forecast. Eight of 13 categories gained, led by gas stations, where sales jumped 6.4%.
On the inflation side, the September producer price index rose 1.3% month over month and 6.3% year over year, the largest monthly gain since March 2022 and the highest annual reading since December 2022, both far exceeding expectations. Core PPI, which excludes food and energy, rose 0.7% month over month and 5.0% year over year, jumping from 0.2% and 4.6% in August.
From the Oil Field to the Cash Register: A Transmission Chain That Is Already Open
The first link in the chain is crude oil. Brent crude rose 0.35% on Wednesday to $106.06 a barrel after two ships were attacked in the Strait of Hormuz and Iranian officials said new tactics were being deployed to strike vessels, reviving fears of supply disruption. Since the US-Iran war broke out in February, this geopolitical thread has been a major driver of US inflation.
The second link is the gas station. Gasoline prices surged 7.1% month over month in September, pushing headline CPI to 3.7% year over year (from 3.4% in August), above the 3.6% expected. Gasoline prices rose 9.1% from August to September, single-handedly contributing more than half of the total increase in CPI.
The third link is the corporate side, which is exactly what Thursday's PPI report revealed: energy prices rose 10.8% month over month, transportation and warehousing prices rose 3.4%, and food rose 1.2%. A notable transmission example is airfares, one of the inputs to the PCE price index, which jumped 5% month over month, meaning fuel costs are entering services pricing through the transportation channel.
Half of the September increase in the PPI final demand goods index could be attributed to higher gasoline prices, which rose 20.3%. Price indexes for diesel fuel, fresh and dry vegetables, jet fuel, residential electric power and crude petroleum also increased. Another clue is that the margin for wholesale and retail trade services jumped 1.4% month over month, the largest gain since April; this metric has been used by the market to gauge whether companies are absorbing tariff costs themselves or passing them on to customers.
The Supreme Court struck down most of Trump's tariffs earlier this year, but the administration is invoking other authorities to keep imposing them, and the trade war with Canada is escalating after negotiations collapsed in August.
But the pass-through is not uniform. Several prices in PPI tied to data center construction actually cooled: electronic components and accessories fell 0.3% month over month, computers and computer equipment edged up 0.1%, and the broad construction cost index was roughly flat; several healthcare categories were also relatively soft. These figures suggest that price pressure is currently concentrated in energy and its immediate downstream rather than spreading broadly, at least in September.
Consumers: The Numbers Have Not Collapsed, but Purchasing Power Is Being Eroded
Headline retail sales beat expectations, which is easy to read as "the consumer is still strong." Breaking down the composition yields a far more cautious conclusion.
First, the 0.8% gain relied heavily on a single category: gas stations. Strip that out and only 0.2% remains; strip out autos, building materials and food services as well and only 0.1% is left. Retail sales data are seasonally adjusted but not inflation adjusted, and factoring in September's 0.6% monthly price increase, real retail sales were "flatter than flat."
Second, real purchasing power is falling. Reports note that inflation-adjusted wages fell again in September; consumers are still spending largely because of high-income households buoyed by stock market gains, the so-called K-shaped economy. The Fed's Beige Book released Wednesday confirmed this: from late August to early October, most districts reported consumer spending was "little changed or unchanged"; even in districts such as Dallas where firms reported solid retail sales, there were "some reports of more cautious spending among lower-income customers."
Another set of data from the Bank of America Institute this week provided more grassroots evidence: use of buy now, pay later (BNPL) is rising. The institute called the pace "not yet overly concerning" but warned that "nearly one in five households using BNPL has more than $500 in outstanding payments." The CEOs of Domino's Pizza and Albertsons both acknowledged on recent earnings calls that many consumers remain in a difficult economic environment.
Moody's chief economist Mark Zandi offered a more striking quantified estimate on October 12: since the US-Iran war broke out in February, the cumulative cost borne by each US household has risen to nearly $2,000, totaling about $265 billion nationwide; average gasoline prices have risen from under $3 before the war to $4.37 a gallon, diesel above $6, and jet fuel nearly doubled, with energy adding nearly $1,100 per household (including direct spending at the pump and higher goods prices from trucking and air transport costs), and "at current fuel prices, household energy costs are still rising by an extra $50 a week." He also noted that higher rates have pushed mortgage costs to 7.5%, equivalent to about $540 more per household, and military spending adds about $360 per household, meaning the total cost of the war has offset roughly half of the income growth of the average American household over the past eight months.
On the other side is anomalous resilience: a healthy job market, larger-than-usual tax refunds and stock market gains together supported consumer demand for most of this year. Economists expect third-quarter consumer spending to grow at an annualized pace of about 3.4% (versus 3.8% in the second quarter), with third-quarter GDP growth estimated at about 3.0% (versus 2.2% in the second quarter).
Another data point on Thursday was also strong: the New York Fed's October manufacturing sentiment index surged 17.9 points to 25.5, above every economist's estimate in a Bloomberg survey and the strongest in nearly five years, with new orders and shipments rising significantly. But in the same report, the index of expected prices paid over the next six months rose to its highest since 2022, effectively a preview from businesses that pressure will persist.
The Fed's Dilemma With Supply-Driven Inflation: October Likely a Hold, Pressure Piles Up to December
Two inflation reports stacked together have pushed the Fed into a harder position. Inflation has been above the 2% target for five and a half years. The federal funds rate currently stands at 3.75%-4.00%, and last month the Fed raised rates for the first time in three years. The next meeting is October 27-28.
CME FedWatch shows that after Wednesday's CPI release, the probability of a rate hike this month briefly rose from about 22% to 50%, then fell back and stabilized around 30%; pricing for a December hike, however, has been firmly locked in, with Citi expecting a December move and market-implied odds for that month briefly approaching 90%.
Wall Street's disagreement is almost entirely focused on "October versus December." TD Securities strategists Oscar Munoz and Gennadiy Goldberg said the day's reports raised the odds of an October hike, "but we still think the Fed will hold and choose December, because the market is already doing some of the work for them." Regan Capital's Skyler Weinand said "it is crystal clear that inflation is sticky and moving in the wrong direction," and expects a pause in October and a resumption of hikes in December. Principal Asset Management's Seema Shah said the question is whether firmer core inflation is enough to change the Fed's path, and the market is clearly uneasy, "but this report is not enough to restart the case for an October hike." LPL Financial's Jeff Roach said inflation pressure is spreading beyond energy, meaning the last leg back to target may be bumpy and rates will stay high, and the report complicates the Fed's decision this month.
Chicago Fed President Austan Goolsbee's remarks last month were a footnote to this policy predicament: supply-driven inflation may be easier to control than the post-pandemic demand-driven kind, but "it won't be painless either." US Bank chief economist Beth Ann Bovino said: "Inflation is the disease, and the medicine the Fed is bringing now is higher interest rates—I don't know which is more painful, because both hurt."
This may be the "2026 policy trap": the Fed cannot produce an extra barrel of oil, end a war, or conjure more memory chips out of thin air. All it can do is slow down the rest of the economy that has nothing to do with oil drilling or data center construction, and the people most likely to feel that are precisely the ones already paying more.
Warsh has pledged not to use his own short-term policy outlook to guide the market, and he will hold a fireside chat with IMF Managing Director Kristalina Georgieva in Bangkok on Friday, a speech whose tone will be scrutinized closely.
US Stocks Face a Test: High Yields Become an Obstacle
After Wednesday's CPI, the S&P 500 fell 1.11% to 7,718 points, ending the longest streak without a 1% single-day drop in six years and marking the worst single-day performance since July; the Nasdaq Composite fell 1.88% to 26,692 points; the Russell 2000 entered correction territory; and an index of chip giants fell 4.3%, down about 12% over six trading sessions.
The 10-year Treasury yield briefly jumped from below 5.17% to above 5.32%, then gave back most of the gain; the dollar hit its highest since May 2025. After Thursday's PPI and retail sales data, Treasury yields extended their decline, and the Nasdaq and S&P 500 opened lower. However, safe-haven demand pushed the 10-year yield down 11 basis points to 5.08%, Nasdaq 100 futures fell 1.1%, and Brent crude retreated to around $104. The market did not react along the simple path of "higher inflation means more aggressive hikes," instead treating the continued collapse of the AI trade (the latest investor disclosure from Anthropic showed slowing growth, South Korea's KOSPI briefly plunged 7.6%, and Samsung and SK Hynix fell more than 9%) as the main safe-haven theme.
Mechanically, high yields suppress US stocks through two channels: first, a higher discount rate directly compresses the valuations of high-valuation assets; second, the enormous capital expenditure on data centers and AI chips relies heavily on financing, and rising borrowing costs directly raise the hurdle for projects. This is why the AI sector's troubles spread this week from "valuation concerns" to "corporate debt concerns." Macro strategist Tatiana Darie put it this way: "The high-yield monster returned to the market after Wednesday's inflation data, haunting stocks and pushing traders into value shares and low-beta sectors."
There were countervailing voices, though. Ulrike Hoffmann-Burchardi of UBS's chief investment office argued that intensifying competition in AI, rising financing needs and higher rates could amplify volatility for a time, but "we view this correction as a recalibration of expectations, not a fundamental rupture in the AI investment story." Vanguard senior economist Adam Schickling noted that as Americans become more "price sensitive" and the economy benefits from productivity gains, inflation should slow, but "patience is required."
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