Inflation Came Back Harder Than Expected

The Big Story: Inflation Came Back Harder Than Expected

The US April inflation report landed Tuesday and it was not good.

Consumer prices rose 3.8% year-on-year in April, the highest reading since May 2023. The monthly jump alone was 0.6%. Energy was the engine: gasoline prices are up 28.4% over the past year, a direct consequence of oil staying elevated while the Strait of Hormuz remains closed. Food prices added another 0.5% in a single month, the biggest monthly jump since August 2022. Core inflation, which strips out food and energy, is running at 2.8%. Four months of hawkish Fed policy and still no meaningful progress toward the 2% target.

The part that stings most: real wages fell. Average hourly earnings slipped 0.5% for the month and are down 0.3% annually after adjusting for inflation. People are earning more in nominal terms and losing ground in real ones.

For anyone holding a large cash position, this is the quarterly update you did not want. A savings account paying 3.5% feels adequate on paper; at 3.8% inflation, it is losing ground. The purchasing power of that cash shrinks every month it sits, steadily, compounding in the wrong direction.

The expat picture adds a layer. A French executive in Singapore earning in SGD and holding savings in EUR is running two inflation exposures simultaneously. Eurozone inflation is climbing on the same energy shock. The ECB is signalling rate hikes, which means EUR cash yields may improve from here, but inflation is moving faster than the interest rate. A Dutch executive with pension savings sitting in euros has watched energy-driven inflation accelerate while the account balance reads exactly what it did six months ago, buying measurably less each month.

The structural point is simple: being invested in assets that respond to inflation, whether equities, short-duration bonds, or real assets, beats sitting in cash when inflation runs above your deposit rate. That is where we are now. The 3.65% US benchmark rate sounded high when it arrived. Against 3.8% headline inflation and a hawkish Fed chair who just took the keys, the margin for cash is razor thin and closing.

What Else Is Moving

Trump-Xi summit: a vague Iran commitment and a handful of deals. The Beijing summit concluded May 15 with limited concrete outcomes. China agreed to a "constructive China-US relationship of strategic stability" as a guiding framework. On trade: China will order 200 Boeing jets (fewer than the 500 initially anticipated), and Nvidia received clearance to sell H200 chips to Chinese companies. On Iran: Trump left with what one analyst called a "vague commitment" from Xi to pressure Tehran to lift the Hormuz blockade. No timeline, no mechanism, no joint statement on the Strait. Xi will visit Washington this autumn. For the oil market, the summit moved nothing. Brent crude is holding around $109/bbl. The diplomatic lever was pulled. The Strait remains closed. (Sources: NBC News, CNBC, Bloomberg, Euronews)

The ECB is signalling rate hikes by June. The European Central Bank held its main rate at 2.15% in April, but the language shifted. A Bloomberg survey of economists published May 11 showed consensus expecting two ECB rate hikes in 2026, with the first as early as June. Energy-driven inflation has pushed eurozone consumer prices toward 2.6%, and GDP growth was only 0.1% in Q1. Europe's central bank is now in the same bind as the Fed: inflation too hot to ignore, growth too fragile to absorb a shock. Markets are pricing an 80% probability of a June increase. For European expats holding EUR-denominated savings or pension assets, rate hikes are income-positive in one direction and growth-negative in another. The net effect depends entirely on which side of the rate move your assets sit. (Sources: ECB, Bloomberg, Euronews)

Kevin Warsh is now running the Federal Reserve. Jerome Powell's term ended May 15. Kevin Warsh, confirmed 54-45 in what CNBC described as the most divisive Fed confirmation in history, took the chair on May 15. His first FOMC meeting is June 16-17. The market has already priced the shift: the CME FedWatch tool shows less than 3% probability of a rate cut at any remaining 2026 FOMC meeting. Some traders are pricing a hike by September. Warsh's public position has long been that inflation must be beaten before accommodation is even discussed. With April CPI printing at 3.8%, he has no political or analytical cover to pivot dovish. The cut many expat borrowers were waiting for is not coming this year. If anything, the next move is up. (Sources: CNBC, NPR, CBS News, Washington Post)

S&P 500 at 7,559 as earnings hold up. Despite 3.8% inflation, a new hawkish Fed chair, and a Middle East conflict with no resolution date, the S&P 500 is trading near 7,560, up 8% for the year. Q1 2026 earnings season has been strong: 84% of reporting companies beat EPS expectations, 81% beat revenue. Equities are absorbing the inflation data because corporate revenues benefit from price increases even as consumers take the hit. This is the argument for being invested rather than in cash: companies pass inflation through to their customers. Cash cannot. (Sources: Seeking Alpha, CommunityAmerica, Motley Fool)

The Expat Takeaway

A lot happened this week, but the through-line is clean: inflation is running at 3.8% in the US, energy is the driver, and the new Fed chair has no mandate to ease. The Beijing summit produced a vague promise on Iran and a Boeing order. The Strait is still closed. The ECB is moving toward hikes. UK gilt yields are at multi-decade highs.

Read this as context, not as an instruction to act.

The structural question is sharper than "how do I protect myself from inflation?" Ask instead: does my current setup actually benefit from inflation staying elevated, or does it lose ground while the balance reads fine?

A few diagnostics. If your cash or deposit savings represent more than six months of living expenses, the excess is losing purchasing power at roughly 0.3% per year in real terms at current rates, a slow leak that compounds over time. If your equity or bond allocation generates income in nominal terms, rising prices work in its favour. If you are holding cash in a currency where rates have not kept pace with inflation, such as euros in a low-yield account, the erosion runs faster.

The second question: what currency is your inflation in? A German executive in Kuala Lumpur spending in MYR, holding savings in EUR, faces eurozone inflation on the EUR side and stable MYR costs on the local side. Those are different problems requiring different tools.

And the third: is your allocation built for a world where rates stay high, or does it depend on cuts that are not coming? Portfolios built for 2021-era low rates are misfiring in 2026. That is the current rate, not a forecast.

If your structure handles all three, this week is a week to watch. If it does not, the issue was not this week.