“‘I will surely strike my hands together at the unjust gain you have made and at the blood you have shed in your midst.”
– Ezekiel 22:13
Monthly Budgets Under Assault
American consumers are being squeezed. Between high grocery prices, rising utility bills, and hefty prices at the pump, little float remains in monthly budgets. An unexpected medical bill or car repair is all it takes to blow the household budget.
We’re all living through stressful macroeconomic crossroads here in mid-2026. For a while, it appeared the post-pandemic inflationary dragon had been slain. We were promised inflation would soon return to the Federal Reserve’s 2 percent target.
But that was before the U.S.-Israel attacked Iran and a new energy shock was triggered. Perhaps the MOU negotiations and reopening of the Strait of Hormuz, with UN evacuation, will soften things in the months ahead. Nonetheless, we do not expect there to be long-lasting relief.
When energy costs spike, they don’t just stay at the pump. They weave their way into the price of just about everything you buy, eat, or touch. And right now, as the Federal Reserve transitions into a new era under inbound Chair Kevin Warsh, the combination of elevated oil prices, persistent consumer price inflation, and nosebleed stock market valuations have created an abundance of risks that are not being properly appreciated.
In short, your purchasing power is being eroded, the new Fed chief is caught between a political rock and an inflationary hard place, and the stock market is behaving like gravity doesn’t exist. To understand why your monthly budget is under assault, we must look at how inflation is composed.
Economists love to talk about core inflation. This metric conveniently strips out food and energy prices because they tend to be volatile. It’s the economic equivalent of saying, “Aside from the rain, it’s a perfectly dry day.”
But as consumers, we live in the real world. We can’t choose to skip buying food or filling the gas tank.
Invisible Tax
Right now, the headline numbers are singing a discordant tune. The May 2026 Consumer Price Index (CPI) report clocked in at a stubborn 4.2 percent year-over-year inflation. The April Personal Consumption Expenditures (PCE) index – the Fed’s preferred metric – sat at 3.8 percent. Both are a country mile away from that 2 percent target.
Thanks to ongoing geopolitical friction and conflict with Iran, a barrel of West Texas Intermediate (WTI) crude – the light sweet stuff – spiked above $100 a barrel in May. It has since dropped to about $69. However, this is well above the $57 price that a barrel of WTI crude fetched at the start of the year. Moreover, the Strategic Petroleum Reserve has been drained to a 43-year low. Refilling it will put an elevated price floor under the price of oil in the months ahead.
Higher oil prices haven’t just been an inconvenience for commuters. Rather, they’re a supply shock that behaves like an invisible tax on the entire global supply chain. When a barrel of oil crosses the triple-digit threshold, a domino effect ripples through the economy.
For starters, diesel fuel gets much more expensive. The trucks delivering fresh produce to your supermarket, the container ships bringing electronics across the ocean, and the delivery vans bringing packages to your doorstep all pass those fuel surcharges directly down the line.
Modern farming is also incredibly energy intensive. From petroleum-based fertilizers to the diesel that runs massive harvesters, expensive energy directly translates to more expensive eggs, milk, and bread.
So, too, there’s the rising input costs for petrochemicals. These are the building blocks of 95 percent of manufactured goods, including packaging, synthetic fabrics, medical devices, and construction materials.
When energy prices rise, it doesn’t take long for transitory spikes to harden into long-term, sticky consumer price inflation. Businesses can absorb higher input costs for a month or two, but eventually, they protect their margins by changing the price tags. That is exactly what we are seeing play out across the retail landscape today.
Oil prices may be moderating. But the impact on consumer prices from the oil price spike is here to stay.
This is why consumer prices will never return to where they were last year, and certainly not to where they were in January 2020. Not unless new Fed Chair Kevin Warsh gets his productivity miracle…
Trial by Fire
Warsh, as you know, faces immense political pressure. President Trump has been highly vocal about his desire to see interest rates slashed. He hand-picked Warsh to replace Jerome Powell because he believed Warsh would play ball.
Trump wants lower rates to better accommodate the financing of the government’s massive pile of debt. But with inflation already running hot, and with the U.S. unemployment rate around 4.3 percent, cutting interest rates will be like pouring jet fuel on the inflationary fire.
Warsh, however, has his own ideas about the economy and the rapid deployment of artificial intelligence (AI). Specifically, he believes “Artificial intelligence is the most productivity-enhancing wave of our lifetimes—past, present, and future.”
His core argument is that the exponential adoption of generative AI across corporate America will spark an unprecedented explosion in productivity. If workers become dramatically more productive thanks to AI tools, companies can produce vastly more output at lower costs.
In theory, this structural shift would allow the Fed to cut interest rates without triggering a traditional demand-driven inflation spiral. It’s a beautiful vision of a high-tech, low-inflation future. But the hard data doesn’t support it – yet, if ever.
According to the latest report from the U.S. Bureau of Labor Statistics, total factor productivity growth is scraping along at just 0.8 percent, while overall labor productivity sits at a modest 2.5 percent. There is simply no evidence in the current data of an AI-driven productivity miracle large enough to offset a massive commodity price shock.
If Warsh caves to political pressure and cuts rates while inflation is running hot and unemployment is low, he risks cementing a 1970s-style stagflationary cycle. If he keeps rates restrictive to elevated price pressures, he risks a severe political backlash and a potential economic slowdown. It’s a trial by fire.
Warsh does not want to repeat the mistakes of the past. At last week’s FOMC meeting, his first as Fed Chair, he issued a dramatically shortened – barebones – policy statement that concludes with a commitment to deliver price stability. This was perceived by the stock market as a hawkish shift, which may presage rate hikes later this year.
What to make of it…
Priced for Perfection
The stock market, without question, has a massive gap to be reckoned with. The divergence between economic fundamentals and stock market prices has widened into a chasm. To see just how stretched things have become, we’ll take a gander at the cyclically adjusted price to earnings (CAPE) Ratio and the Buffett Indicator.
Created by Nobel laureate Robert Shiller, the CAPE ratio measures the price of the S&P 500 against the average of its trailing 10 years of earnings, adjusted for inflation. By smoothing out short-term corporate profit spikes, it gives us a clear look at whether stocks are historically cheap or expensive.
Historically, the long-term average for the CAPE ratio sits around 17. During periods of healthy economic growth, a reading in the low-to-mid 20s is perfectly normal. Today, the CAPE ratio is at 41. The only time it has been higher is at the peak of the dot-com bubble when it exceeded 44 in December 1999.
When the CAPE ratio is this stretched, it means investors are paying an extreme premium for every dollar of corporate earnings. This leaves zero margin for error if rising input costs drag down future corporate profits.
The Buffett indicator is also currently off the charts. Favored by Warren Buffett himself, this metric takes the total market capitalization of all publicly traded U.S. stocks and divides it by the current Gross Domestic Product (GDP) of the United States. It provides a look at the size of the stock market relative to the size of the actual economy supporting it.
A reading of 100 percent implies the stock market is perfectly in line with economic output. When the indicator crossed 140 percent, it has historically signaled severe overvaluation. Right now, the Buffett Indicator is screaming well north of 235 percent.
Wall Street is banking on magic. It has essentially priced in a perfect, flawless economic reality. One where the war with Iran magically resolves overnight, energy prices plummet back to $60 a barrel, consumer price inflation instantly melts down to 2 percent, and Kevin Warsh’s AI productivity miracle manifests perfectly in short order.
We expect the latter half of the year to be rough for broad market index investors.
[Editor’s note: Get a free copy of an important special report called, “Fission for Millions – The Ultimate Bet on the AI Energy Crisis,” when you join the Economic Prism mailing list today. If you want a special trial deal to check out MN Gordon’s Wealth Prism Letter, you can grab that here.]
Sincerely,
MN Gordon
for Economic Prism
