Rising inflation, oil distracts Wall Street from China trade prospects

MANHATTAN (CN) — Investors this week hoped for hints that U.S-China trade relations could improve, but continued strife in the Strait of Hormuz and renascent inflation eclipsed any optimism.

President Donald Trump said Friday he made some “fantastic trade deals” after a meeting with Chinese President Xi Jinping, but details remain murky. By the closing bell on Friday, barrels of Brent crude had jumped to nearly $110 as the Iran war continues, and yields for 30-year Treasurys hit their highest point since last May as high inflation returned.

Equities flatlined this week: The Dow Jones Industrial Average lost 78 points for the week, the S&P 500 increased 10 points, and the Nasdaq fell 22 points.

Inflation, once again, is one of the main culprits for Wall Street’s woes. The producer price index for April showed a 1.4% monthly increase in prices, putting them 6% higher year-over-year. This is the highest jump in inflation in more than three years, since the end of 2022.

Gasoline prices predictably jumped 16% last month, but other sections of the report also saw enormous jumps in prices. Electronic component prices are 27% higher than they were a year ago, while vegetables are nearly 57% higher from last April.

Investors had a slightly better report on Tuesday, when the consumer price index showed prices rose 0.6% in April and 3.8% from a year ago, the highest annualized rise since May 2023 and the second consecutive month with annual inflation above 3%.

The 3.8% monthly rise in energy prices was a big reason for the increase, but not the only reason. Excluding volatile food and energy prices, core inflation saw a 0.4% monthly increase, slightly above what even experts had predicted.

Among other areas that saw sizable price surges were shelter and apparel, both of whose prices rose 0.6% in April, as well as the 2.8% increase in airfare prices.

The combination of the inflation reports gives the doves at the Federal Reserve more justification to keep interest rates where they are, despite an incoming chair who seems inclined to cut rates.

“Stickier core inflation from AI buildout, passthrough from the oil price shock and lingering tariff effects will keep the Federal Reserve at bay for most of 2026,” Grace Zwemmer, economist at Oxford Economics, wrote in an investor’s note.

“Eventually, we expect higher energy prices will feed through to weaker consumer spending and a softer labor market, prompting the Fed to deliver its next rate cut in December,” she added.

Other economic data for the week had a lukewarm impact on Wall Street. Retail sales for April increased by 0.5%, as expected. However, the 0.5% increase in sales — which excludes automobiles, gasoline and food — failed to hit the 0.7% forecast.

With revisions to past reports, retail sales for the past 12 months are close to 2%, which experts say shows consumers are not buckling under inflationary pressures but not spending with gusto either.

Optimism among small businesses essentially remained the same this month, according to the National Federation of Independent Business. However, businesses reported increasing actual and planned price increases last month, which signals growing inflation.

“Inflationary pressures continue to be a challenge for Main Street,” NFIB chief economist Bill Dunkelberg said in a statement, adding that recent tax cuts should “start to feed into the private sector over the next few months.”

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