Oil Shock Drives Inflation Spike While Tech Giants Double Down on AI Capex; Labor Markets Show Resilience
The Iran conflict has sent oil prices up 80% since the start of 2026, pushing inflation to 3.5%, while major tech firms announce record AI spending and U.S. labor markets maintain surprising strength despite consumer pessimism.
Energy Crisis Reshapes Economic Outlook
For much of the period since the TBAC last met in early February, financial markets have been highly influenced by oil prices, which are up nearly 60% since the start off the Iran conflict, and nearly 80% since the start of 2026.
Headline Inflation Surges on Energy Costs
Headline inflation increased due to the rise in energy prices with PCE at 3.5% YoY in March. Core measures of inflation remain somewhat elevated above the two-percent target. A substantial wedge has opened between core PCE at 3.2% YoY and core CPI at 2.6% YoY.
Tech Giants Pivot to AI Infrastructure Investment
Meta, Amazon, Microsoft, and Alphabet have collectively signaled roughly $725 billion in capital expenditures for 2026, almost entirely earmarked for data centers, custom chips, GPUs, and AI models—an increase of more than 75% year-over-year. At the same time, the sector is trimming headcount: Meta plans to lay off 8,000 employees in May, Amazon has cut roughly 30,000 roles in recent months, and Microsoft has offered voluntary buyouts to about 125,000 employees.
U.S. Outperformance on Energy Exports
US exports of energy products soared to record highs in the past two months. Markets clearly believe that the US economy is likely to weather the impact of the Iran war better than other countries. Meanwhile, unlike Asia and Europe, the Iran conflict is a positive terms-of-trade shock for the US given its vast energy resources.