Inflation Spreads, Chips Stumble, Bonds Rally*
Week of October 12, 2026
Inflation reports this week showed price pressure spreading beyond energy, and markets reacted in an unusual way. Investors moved out of technology, especially the semiconductor makers at the center of the artificial intelligence buildout, and into consumer staples, energy, health care and materials, all of which rose. The broad stock market still had its worst week since June because technology is so large a share of it. Long-term Treasury yields fell sharply even though inflation was hotter than expected, a sign that bond investors are growing more concerned about growth and about the risk that the Federal Reserve raises rates into a slowing economy. Oil rose above $100 a barrel as attacks around the Strait of Hormuz intensified. The economy itself kept growing: factory output rose, layoffs stayed near historic lows, and business surveys in the Northeast were strong.
The week in brief
- Consumer prices rose 3.7% over the past year, the fastest since May, with gasoline the biggest contributor.
- Underlying inflation, which excludes food and energy, rose to 2.6% from 2.4%, a little faster than expected.
- Prices paid by producers posted their biggest monthly increase since early 2022, and import prices rose 8.1% from a year ago.
- Retail sales rose 0.8%, but most of the gain was higher gasoline prices. Spending on core retail categories barely grew.
- Factory output and capacity use rose, helped by utilities and semiconductors. Weekly unemployment claims stayed below 200,000.
- Small business optimism slipped below its long-term average, with inflation again a leading concern.
- The 10-year Treasury yield fell to about 5.09% from 5.24%, and the 30-year to about 5.43%, on growing concern about growth and the Fed's path.
- Odds of a Fed rate increase in October fell to about 16% after briefly rising on the inflation data. A December increase is priced at roughly 90%.
- Oil rose about 10% to just over $101 a barrel; the global benchmark reached $110.
- Stocks fell about 1.9%. Semiconductor stocks had their worst week since April 2025, while energy and consumer staples rose about 5%.
- The federal deficit for the fiscal year that ended in September was $1.99 trillion, up 12%.
- Our internal conditions gauge fell to +5.97 from +7.46, still higher than about 93% of the past four years.
- What matters next: the Federal Reserve decision on Wednesday, October 28, and the first estimate of third-quarter growth on Thursday, October 29.
Inflation spread beyond energy
Gasoline prices rose 9% in September and accounted for more than half of the increase in consumer prices. The more important news was outside energy. Underlying prices rose 0.3% for the month, and over the past three months they have risen at an annual pace of about 3.4%, well above where they were in the summer. Car prices, airfares, education and recreation all rose.
Earlier stages of the supply chain point the same way. Prices received by producers rose 1.3% in September, the largest monthly increase since March 2022. Import prices rose 1.1%, and prices of imported goods other than fuel are up 6% from a year ago, with equipment and industrial materials leading. The Federal Reserve's regional survey of businesses described price growth as strong in three of its twelve districts and moderate in eight.
The economy kept growing, unevenly
Industrial production rose 0.7% in September, more than expected, and factories are running at their highest utilization rate in this cycle. Much of the strength came from utilities and from semiconductor production, which is up about 20% from a year ago. Excluding high-technology industries, factory output is up less than 1% over the year. A New York manufacturing survey reached its highest level since late 2021, while a Philadelphia survey showed new orders slowing sharply.
Consumers are spending, but more of each dollar is going to fuel. Retail sales rose 0.8% in September; excluding gas stations, they rose 0.2%, and the core categories used to estimate economic growth rose only 0.1%, less than prices. Small business owners' optimism dipped just below its long-run average, with more owners naming inflation as their biggest problem. Layoffs remain very low: weekly unemployment claims stayed near 199,000.
Bonds rallied on growth and policy worries
The 10-year Treasury yield fell about 15 basis points (0.15 percentage point) this week, to around 5.09%, and the 30-year about 17 basis points, to around 5.43%. That is an unusual response to hotter inflation, and it points to two concerns. The first is growth: a pullback in spending on AI infrastructure, which has accounted for a large share of business investment this year, would slow the economy. The second is the Fed itself. Markets raised the odds of a December rate increase this week even as signs of a softer economy accumulated: core retail sales fell after adjusting for prices, small business optimism slipped, and hiring remains flat. Much of today's inflation comes from energy supply disruptions that higher interest rates cannot fix. Bond investors appear to be weighing the risk that the Fed tightens into a slowing economy.
The details support that reading. Market measures of inflation expected over the next two years rose, while long-term measures barely moved, so the decline in long-term yields came from lower expected inflation-adjusted rates, not from lower inflation expectations.
Average 30-year mortgage rates held at 7.40%, the highest since November 2023. The weekly survey closed before most of the drop in Treasury yields, so the effect on mortgage rates may show up next week, though lender rates have recently stayed unusually high relative to Treasuries.
The Fed: October looks like a pause, December like a hike
After the inflation report, the market's odds of a rate increase at the October 28 meeting roughly doubled. They fell back to about 16% after Fed Chair Kevin Warsh, speaking in Bangkok, declined to signal either way and said he does not prejudge meetings. Markets now put the odds of an increase by December at about 90%, higher than a week ago. The inflation data made a December move more likely, not an October one.
Oil: above $100 on three fronts
Oil prices rose for seven straight sessions, finishing near $101 a barrel for the U.S. benchmark and $110 for the global benchmark, the highest since May. Attacks on shipping around the Strait of Hormuz increased, a missile aimed at a Saudi export port on the Red Sea was intercepted, and a truce on energy infrastructure between Russia and Ukraine broke down. Governments responded with additional emergency releases, including a proposed exchange of up to 17 million barrels from the U.S. Strategic Petroleum Reserve. Shipping data sources still disagree about the level of oil moving through the strait, but this week they agreed on the direction: flows fell. Diesel prices, which had declined for two weeks, rose again.
Stocks: a broad rotation away from AI hardware
The S&P 500 fell about 1.9% and the technology-heavy Nasdaq about 4.5%, while the Dow rose 0.7%. Semiconductor stocks fell for eight straight sessions, their longest losing streak since 2008, on concerns about competition from China, the cost of financing the AI buildout, and higher interest rates. The selling was heaviest among companies that borrow to build AI infrastructure and lightest among the large, cash-rich technology platforms. The rotation stayed inside the stock market: consumer staples and energy each rose about 5%, health care 3.4% and materials 2.5%, and utilities also gained. Earnings season expands next week.
What our internal gauge says
Our internal conditions gauge fell to +5.97 from +7.46, still higher than about 93% of the past four years.
Three of the 67 measures changed. Small business optimism moved below its long-term average, and a market-based measure of expected inflation over the next two years rose through our threshold after the consumer price report. That second change is the clearest sign in our gauge that the broadening of price pressures is real. On the positive side, stock market leadership broadened: more sectors are now beating the overall market this year, though part of that reflects the decline in large technology stocks rather than strength elsewhere. Several other measures moved in a less favorable direction without crossing a line, most notably underlying consumer inflation, core retail spending and global shipping rates, which we are reading more carefully.
The gauge continues to read business activity as broad, hiring as stalled, and inflation as firm. This week added evidence that price pressures are widening, at a time when consumers are spending more of their budgets on fuel.
What we are watching
Early next week brings homebuilder sentiment and housing starts.
Thursday, October 22 brings the leading economic indicators, and Friday, October 23 the final October consumer sentiment survey.
Wednesday, October 28 is the Federal Reserve decision, and Thursday, October 29 brings the first estimate of third-quarter growth and September consumer spending and inflation.
Tuesday, November 3 is Election Day, and Wednesday, November 4 brings the Treasury's quarterly borrowing announcement.
This commentary is provided for informational and educational purposes only and does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation regarding any security, sector, or investment strategy. The views expressed reflect the opinions of Private Wealth Advisors as of the date written and are subject to change without notice. Information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Past performance is not indicative of future results, and all investing involves risk, including the possible loss of principal. Nothing contained herein should be construed as personalized investment, tax, or legal advice.
*The section titled "Inflation Spreads, Chips Stumble, Bonds Rally" was drafted with the assistance of artificial intelligence tools under the direction and editorial review of Marty Mazorra, Chief Investment Officer of Private Wealth Advisors. All analysis, conclusions, and final content are his own.
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