The Market's Huge Warning Sign

In this episode of Motley Fool Hidden Gems Investing, Motley Fool contributors Travis Hoium, Rachel Warren, and Tyler Crowe discuss:

• Consumer Price Index (CPI) surge.
• Producer Price Index (PPI) surge.
• What higher inflation means for the market.

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A full transcript is below.

This podcast was recorded on May 13, 2026.

Travis Hoium: Inflation is back, and Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium, joined today by Rachel Warren and our substitute for Lou Whiteman, Tyler Crowe. Guys, we're going to talk a lot about inflation today, and before you think that this is going to be a boring episode, we are going to tie this to what this means to investing because inflation is not all that fun. I don't think it when prices go up. I don't think anybody really does, but it really matters to what's going to happen to the market. We're going to try to piece all this together. The thing that came out earlier this week, we'll get to PPI in just a second, but CPI came out earlier this week. That's the Consumer Price Index. This is what you and I feel when we go to the grocery store, or we fill up our gas tank. Inflation, Rachel, was 3.8% in the month of April. That was hotter than expected and much higher than the two or 3% that the Fed would like inflation to be at, and things are really picking up. Energy prices were up 6.1%, vehicle maintenance is up, food is up. That's the stuff that we feel as consumers. What stuck out to you in the data, and how do you wrap your head around it?

Rachel Warren: Well, that headline numbers up a bit from 3.3% in March. It's the highest annual rate we're seeing since May of 2023. That spike, though, as you noted, it's being heavily fueled by. We saw an energy index surge of 17.9% over the last 12 months. Energy commodities spike 29.2%, gas prices up 28.4%, fuel oil rising 54.3%. Core inflation, so excluding volatile food and energy costs, also accelerated to 2.8% annually, hitting a monthly increase of 0.4%, but consumers are seeing price hikes in everyday categories. Electricity costs, motor vehicle maintenance, airline fares. Obviously, the really immediate ramifications are the squeeze on the consumer. I mean, we're seeing inflation outpace annual wage growth for the first time in three years that actually drove real inflation-adjusted hourly earnings down by 0.3% based on this recent readout. Now, there's been some speculation that this could maybe alter the Fed's playbook. We're seeing fixed income markets are adjusting to this higher-for-longer rate environment. You've got some analysts floating the possibility of a rate hike. I think ultimately we're seeing a reality where there's this prolonged gap between sticky inflation. We're seeing low-yielding traditional bank accounts, means that cash reserves might rapidly lose their purchasing power. There are a lot of first and second-order impacts on consumers, and it's something that's not just going to go away, even if the current conflict that we're seeing that's driving some of these price hikes is to abate in the next two to three weeks.

Travis Hoium: Tyler, one of the interesting things is the market does not really seem to care that the CPI is going up, in particular. One of the pushbacks I always get when I post about this is, hey, as long as the hyperscalars continue to spend $1 trillion plus or minus on building out this AI infrastructure, who cares if bananas are a little bit more expensive or it costs a little bit more to fill your gas tank. There's a little bit of truth to that, but it also seems like it's a little worrying under the surface.

Tyler Crowe: This is not just something that we're seeing in these numbers right now. It's been bubbling under the surface, like we said, the market's rallying. S&P 500, as we'll call it, a representative sample of the entire market, is doing well. I mean, it's up 8% this year. The next one hundred up 16%, but if you start to look down into the components, there is really a have and have-nots aspect to this, mostly related to AI infrastructure spending and all the trickle-down effects when you get into that because right now only 52% of the stocks in the S&P 500 are now above their 50-day moving average, which basically means you have almost half, 48% of them are basically, trending down and probably headed down further in the sense of consumer spending. We're seeing margins compression, we're seeing a lack of sales.

We discussed this a little bit yesterday, Travis, talking about consumer goods stocks like Nike, where we're seeing having to go to discounting and things like that to drive sales, but it's also just leading to margin pressure for them, and that's also because consumers are feeling it as well on these particular companies. In this strange sense, from the wallet perspective, we feel what's going on with inflation. But the market doesn't seem to care because you have this weird place of AI infrastructure spending with these gigantic companies that are either spending on the cash on hand or spending it from cash from operations, where they don't have to take on debt. What they're not worried too much about inflation rates or anything like that, because it's not like there's going to be long-term consequences to what they're doing.

Travis Hoium: It's a really interesting dynamic. The other thing is that we have not seen a huge impact on the labor market, at least from an unemployment perspective. Rachel pointed out that wages are not keeping up with inflation, at least in the last few months. That could end up being an issue, but we haven't seen those layoffs because of AI yet. Maybe things change if that comes to the fore. When we come back, we are going to get to PPI and what those numbers look like. You're listening to Motley Fool Hidden Gems Investing.

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Travis Hoium: Welcome back to Motley Fool Hidden Gems Investing. PPI, or the Producer Price Index, also came out this morning as we're recording, and that was even more shocking when I saw those numbers. Tyler, prices were up 1.4% in the month of April. That was from a month ago, that's not the year-over-year. That was the month-over-month number. Year over year was up 6%, energy was up, food was up, services are up. This seems it's only going to make that CPI number that we talked about in the first segment worse, but we haven't quite even seen this flow through yet.

Tyler Crowe: PPI, you could say, is the leading indicator of CPI because it's higher up the supply chain. Your distributors, your manufacturers, that are going to add value and then finally get it to the customer, eventually. This is where they're seeing the pricing pressure from a lot of things that we were just talking about. You have basically this supply bottleneck, talking about AI hyperscalar infrastructure spending. It feels like every discussion we have these days comes back in some way or another to AI infrastructure spending because it's so large, but you look at a lot of suppliers in these industries. They're looking at book-to-bill ratios where the amount of orders coming in the door 70% more than the equipment that they're shipping out on any given month, backlogs for stuff multiple years. The equipment that they're having to produce and supplies they're producing having to bring in the door are going way up. You have this bottleneck of beeps basically, companies that cannot make things fast enough to get out the door, that's driving up prices.

Then, on the original raw material side, we have the closure of the Strait of Hormuz. You want to call it the war, the conflict, whatever term you want to put to what is happening, it's just basically the closure of the Strait of Hormuz has wider implications. We're not just talking about oil and gas here and refined products. This is a part of the world that exports 10 to 20% of the world's aluminum, 20 to 30% of the world's fertilizer, 30 to 40% of the world's helium, which sounds weird. I'm not talking about balloons, I'm talking about semiconductors and medical imaging. These are the things that matter when we're talking about.

Travis Hoium: These are the weird disruptions that we had during the pandemic that we didn't realize that were going to have a huge impact, but it's some small product that ends up breaking the supply chain.

Tyler Crowe: We're getting to the point now where these things are really starting to bleed through because a couple of weeks, we all started pulling at our hair and thought the world was on fire, but we started to get through, but it's now been seven or eight weeks, and now we're looking at actual shortages. The U.S. has been drawing down this Strategic Petroleum Reserve. Inventories have been dropping worldwide. We're starting to see European curtailment of flights is already. I think it was they said two million passenger range in this month alone. There's a lot of things where we're starting to see the tightening of the markets to the point where we're seeing very high rising prices because we're just in short supply, and it's hard to see that changing anytime soon.

Travis Hoium: Rachel, I want to add commodities into this. Tyler alluded to this, but some of these numbers, if you look at the year-over-year changes, are absolutely crazy. Crude oil, that's a little over 60%, gasoline up 71%, but if we go to something like metals, silver is up 170%, lithium-ion batteries, up over 200%, you go to food, wheat is up 27%. That's a smaller number, but that's actually making its way into those food prices that we talked about earlier, up 58%. This is not the same as a year ago, when we were talking about inflation because there was going to be tariffs. Tariffs, you could go, well, it's a little bit of take money from your left pocket and put it in your right pocket. Maybe there's a little bit of a jobs benefit for the U.S. economy. If Joe, those jobs are being pulled back, you can move things around. It's much harder to move things around when your core raw materials are going up, being priced astronomically. We'll talk about companies in just a second, but this is going across the supply chain to things like memory and chips, and all kinds of stuff. This seems like something we really need to keep an eye on.

Rachel Warren: I mean, the reverberations are basically across every sector you can think of, and that's why PPI is so important. It acts as this very key indicator of inflation. It tracks price fluctuations before they ever reach consumers. You think of it as the early warning system for consumers. Consumer Price Index tracks what you and I pay at the register. But the Producer Price Index, or PPI, tracks inflation to the factory floor. What businesses are paying for raw materials, like you just mentioned, fuel, wholesale supplies, before those products ever reach a store shelf? We are seeing astronomical spikes in the cost of energy to run factories, food ingredients, for packaging, and just the baseline services required to ship goods. If you're looking at this as an investor or as an everyday consumer, this is a look into the immediate future and what it spells for a lot of these different costs.

The important thing to note is when the costs of making a product explode this quickly, most businesses can't afford to just absorb the financial hit. Obviously, to protect their margins, they are going to eventually pass that down to the consumer. I do think if you're looking at this today, it is a bit of a preview of what we're going to be seeing in terms of price hikes on grocery shelves, retail websites, at the gas pump. I think it also underscores the fact that, as robust as the stock market's performance continues to be, there is and remains a fundamental disconnect between the realized economic reality for a lot of consumers. That's also important to us as investors, for a lot of the companies that we own and follow.

Travis Hoium: You alluded to it, where we're going to try to tie all this together in the next segment and talk about what this means for us as investors in the market going forward. You're listening to Motley Fool Hidden Gems Investing.

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Travis Hoium: Welcome back to Motley Fool Hidden Gems Investing. We've talked about CPI, we've talked about PPI. Now, what does this actually mean to the bottom line and to our investments? We know that consumers are getting more stretched, some costs are going up. I've been hearing a lot more reports about supply chains being stretched. Apple are still undersupplied with iPhones. They're maybe not making as many Macs as they would like or could sell because of chip shortages, and memory costs are going up, so maybe margins get squeezed. You have companies like Target, Walmart, Costco, that's they're the consumer touch point. Some of those stocks are extremely highly valued, 40, 50 times earnings. Rachel, with all of this backdrop of inflation, of this tenuous position that consumers are in, but yet we're still investing a ton in artificial intelligence. Where are you looking at risks and opportunities for investors?

Rachel Warren: I mean, I think there are risks and opportunities across a range of markets. One of the things that's interesting to consider is the subscription models for services like Netflix and Spotify. I mean, these are services that tend to be built on recurring monthly cycles. Historically, there's this level of baseline consistency, but what we'll often see in these, maybe difficult macro periods, is maybe instead of a user maintaining three or four active streaming subscriptions, they'll have a cyclical pattern. Maybe they'll subscribe, say to Netflix for a single season of a show, and then they'll cancel, especially during these periods of economic pressure. I think that's something that could be a risk to what I think are fundamentally great businesses like Netflix and Spotify.

You talked a bit about the retailers, so Target's an interesting example. They rely really heavily on home decor and apparel sales. There's a much broader exposure to non-essential spending. Whereas you have Walmart, they have about 60% of their U.S. sales come from grocery sales and household staples. One other example, you think of a premium operator like Costco, they make most of their profits from their membership-based model. That's giving them pretty predictable cash flows as well during past volatile periods, and not saying necessarily go out and buy Walmart and Costco, but I do think it's important to understand where the resilient businesses are and how those cyclical elements trickle down overall.

Travis Hoium: Tyler, how do you think about this cyclicality? Because it does seem, man, when prices go up like this. The last time this happened was in 2021, going into 2022. The market was not real happy at a certain point, but it took a little while to get to that point where the market went, oh, my gosh, this is a problem.

Tyler Crowe: At least to a degree. There's, I think, maybe a little bit more expectation this could be coming, also in 2022, the thing that we had coinciding with it was 0% interest rates for a while. Then all of a sudden, we're like, man, we really need to change course here. We're already, I think, the federal fund rates is 3.5, 3.75. There's already some built-in interest rate.

Travis Hoium: But I think the expectation has been that we were going to lower those rates, and maybe now we may be moving to a point where the expectation is we're going to have to raise those rates. That seems to be where the market goes. Oh, my gosh, we had to raise our discount rate, and then valuations start to fall because those rate expectations changed.

Tyler Crowe: I think it's a fair thing, and when it comes to valuation, perhaps. I don't know, I feel there's a lot of more growth-oriented people that are maybe throwing valuation to the wayside these days, perhaps to my chagrin, and why some of the stuff I've been buying has not been doing as well. But when I'm thinking about this specifically in the consumer spending, inflation going up, budgets tightening, I'm actually, the thing that I'm most thinking is at risk is the middle market stuff, not the discretionary, the Walmarts, the Costcos of the world, or the top end, it's that stuff in the middle. Here's why I'm coming at it from this way, I don't think it's any secret. There's been reports all over 50% of consumer spending these days is from the top 10% of earners in the United States. In that regard, a lot of those things where you see discretionary spending on the higher-end things might not change that much.

I mean, take airlines, for example, we have been talking about higher gas prices, and one of the biggest causes of inflation was airline tickets. Yet, over the past couple of weeks where we saw airlines give guidance for 2026, all of them raised earnings guidance, and they were saying, we're booked up, things are looking really good. Maybe when international flights start to get canceled, we'll see a change in heart there, but for right now, the well off basically propping up a lot of spending in that regard. Then, back to the essentials, you have the Walmarts, the Costcos of the world, it's hard to see them really suffering as a result. Maybe some of the mix on products is different, but what I'm thinking is things in the middle, fast casual restaurants, athletic wear, cosmetics, automotive, things where people across all income spectrums are paying up to do, but aren't necessarily like the things that you have to do in any given day.

Like we said, yesterday's show, we were talking about the athletic wear market. Unsurprisingly, the company that we pointed out is doing the best was on holdings. Again, very much on the upper end, targeting that higher spending demographic relative to everyone else in their industry who are not doing quite as well. If you're looking at risk of the consumer, I think it's that real middle market area of the Chipotles of the world, the Canvas, the Nikes, things like that, where you're going to see the most impact on how people spend their money and likely to see the discounting, the struggle for sales, struggles with inventory, maybe some write downs and things like that. Where, at least from a business perspective, I think we're going to see the most effect, and then valuation. I feel like we've been trying to guess what people think about valuations for 15, 20 years, and I've been getting it wrong every time, anyway, so we'll see.

Travis Hoium: The one thing that I want to add is, this is a point in the market where I'm looking very closely at one valuations, but balance sheets, because whether this current point is the peak in 2021, whether we're going into 2008, 2009, whether it's dot-com or AI is the new dot-com bubble, we don't know what that future looks like, but companies that have really good balance sheets have some differentiation, pricing power, they're going to be able to survive whatever comes next, whether that's good or bad. These fluctuations in inflation and things like that maybe aren't necessarily the same impacts for those stronger companies. That's just one thing I want to flag for investors is there's a lot of uncertainty out there. I have more questions than answers, but I think Lou's K-shaped economy is exactly what Tyler is talking about.

As always, people on the program may have an interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows The Motley Fool's editorial standards, and it's not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Tyler Crowe, Rachel Warren, and Dan Boyd behind the glass, I'm Travis Hoium. Thanks for listening, we'll see you here tomorrow.

Rachel Warren has positions in Apple. Travis Hoium has positions in Spotify Technology. Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Chipotle Mexican Grill, Costco Wholesale, Netflix, Nike, Spotify Technology, Target, and Walmart. The Motley Fool recommends the following options: short June 2026 $36 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.