June 30, 2026

The Markets

Lowering inflation may prove to be a challenge.

Last week, inflation was on the minds of investors after one of the Federal Reserve (Fed)’s favorite inflation gauges showed inflation at a three-year high. Both headline and core inflation were well above the Fed’s two percent target.

Personal Consumption Expenditures (PCE) Index	May 2026 Price Increase (year over year)
Headline inflation	+ 4.1 percent
Core inflation (excludes volatile food and energy prices)	+3.4 percent

This was the third consecutive month of accelerating price increases, reported Megan Leonhardt of Barron’s. Prices have been rising, in part, due to the energy shock created by the Iran conflict, but inflation is not just an energy story, anymore. Other factors are creating price pressures, including:

Inflation expectations are changing. When consumers believe that prices will keep rising, they ask for higher wages and spend sooner, pushing prices higher still. The Fed likes to keep expectations anchored with its 2 percent inflation goal. Right now, that anchor is less secure than the Fed would like. Americans who participated in the most recent University of Michigan Consumer Sentiment survey expect inflation to average 4.6 percent over the next year.

AI is making devices more expensive. The AI build-out requires a lot of advanced memory chips, the same chips inside your phone, laptop, and car. Demand has been outpacing supply, pressuring prices. Last week two major tech companies raised prices on consumer electronics and software. Industry leaders warn chip shortages could persist beyond 2028, reported Don Forbes of Dow Jones Newswires.

Tariffs effects are rippling through. Import taxes don't hit prices immediately. The effects are realized over months as inventories turn over and companies reset prices. Ron Mau and Tucker Smith of the Dallas Fed found that core inflation in March 2026 (3.2 percent) would have been lower (2.3 percent) if there were no tariffs.

Another complication in the Fed’s inflation fight is the national debt, which stands at about $39.3 trillion. This year, the annual interest payment on the debt is expected to exceed $1 trillion. Some economists are concerned that deficit-driven spending will make it more difficult for the Fed to fight inflation because higher rates will increase the interest owed, reported Maria Eloisa Capurro of Bloomberg.

Last week, the Dow Jones Industrial Average eked out a gain, while the Standard & Poor’s 500 and Nasdaq Composite Indexes fell. Yields on U.S. Treasuries generally moved lower over the week.

Data as of 6/26/26	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 Index	-2.0%	7.4%	19.8%	19.3%	11.4%	13.9%
Dow Jones Global ex-U.S. Index	-2.3	10.6	23.5	15.8	5.4	7.6
10-year Treasury Note (yield only)	4.4	N/A	4.3	3.7	1.5	1.5
S&P GSCI Gold Index	-3.5	-5.6	22.4	28.4	18.1	12.0
Bloomberg Commodity Index	-3.1	12.1	19.9	6.7	5.7	3.6

Will Artificial Intelligence (AI) Make Us More Productive?

There is a broad belief that AI will deliver a productivity boom, reinvigorating economic growth in countries around the world, but the path to productivity remains uncertain.

While AI is unquestionably changing the way many people work, not everyone uses it in the same way. Jue Wang, Anne Hoecker, Ann Bosche, Tamara Lewis, and Peter Bowen of Bain & Company wrote, “A small percentage of people at every level have had the visceral ‘this is it moment’… The rest (i.e., most) are still at ‘I tried Copilot a few months ago; it didn’t work well.’”

There are many different theories about where AI will lead us. Here are some possibilities:

AI increases productivity. According to a 2026 Deloitte report tracking the adoption and impact of AI in companies, two-thirds of participating organizations reported productivity and efficiency gains. Deloitte’s U.S. head of AI Jim Rowan stated, “The organizations succeeding with AI aren’t just investing in automation and algorithms, they’re investing in their people. As AI continues to spark new ways of working, this dual focus – advancing both the capabilities of their talent and AI tools – empowers teams to embrace reimagined business models and sets the foundation for competitive advantage.”

AI increases costs. AI subscription and token costs have been increasing. (Tokens are units of data that determine how much companies pay for AI compute power.) “[AI] Agents consume significant tokens on multistep reasoning, error correction, and context loading, which add up fast on complex workflows… Net-net: The models get less expensive per token, the usage gets heavier per task, and the bill stays stubbornly high,” reported Bain.

AI increases efficiency. Tracy Alloway of Bloomberg recently wrote about the Bank of Korea’s study exploring the effect of AI on productivity and output. Korea’s central bank discovered a productivity disconnect. AI reduced the time required to accomplish tasks, but the extra time was not used to do more high-value work. The technology improved efficiency but not productivity.

AI increases administrative work. There is also the possibility that AI will increase administrative burdens rather than relieve them, according to Alloway. “In the U.S., for instance, you hear stories now of insurance companies using AI to reject claims. At the same time, there are startups dedicated to using AI to fight back against insurance claim rejections… You can imagine a future where AI doesn’t lead to productivity gains but instead generates an endless stream of bots interacting with bots.”

Whether AI delivers productivity gains will depend on how the technology develops and how organizations deploy it.

Weekly Focus – Think About It

“Life is a series of natural and spontaneous changes. Don't resist them; that only creates sorrow. Let reality be reality. Let things flow naturally forward in whatever way they like.”

–Lao Tzu, Philosopher

Wishing you and your families well,
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management

Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

---