BNP Paribas analysis says demand remains the main driver of inflation in the United States, but its impact has eased from post‑Covid peaks. The review uses Bureau of Economic Analysis data and a San Francisco Fed method developed by A. Shapiro to split inflation into demand and supply contributions.
It finds the supply contribution is lower than in 2022, but still present, and close to 2018–19 levels. The report links ongoing supply pressures to tariffs, higher input prices and longer delivery times, with constraints said to have edged up since the Trump administration’s tariff rises.
Demand And Supply Components
Demand still contributes more than supply, in line with resilient consumption and its post‑Covid outperformance. It also notes that this demand momentum has moderated in recent months, alongside a weakening labour market.
The article states it was produced with the help of an Artificial Intelligence tool and reviewed by an editor.
We are seeing a clear shift in what is driving inflation as of April 2026. While strong demand was the main story through much of 2025, its influence is now fading, yet inflation remains stubborn. The latest March Core PCE data, which came in at a persistent 3.1%, shows that supply-side issues are keeping prices elevated more than many expected.
These supply constraints are becoming more apparent and feel similar to the 2018-2019 period. March’s ISM manufacturing survey confirmed this, with the prices paid index jumping unexpectedly and supplier delivery times slowing for the second consecutive month. This suggests that ongoing trade frictions and higher input costs are creating a floor for inflation that monetary policy has difficulty addressing.
Market Trading Implications
This dynamic is happening just as the labor market is finally showing signs of cooling. The last jobs report revealed job growth slowing and the unemployment rate ticking up to 4.2%, confirming the trend of weakening demand we have been watching. This combination of moderating growth and sticky supply-driven inflation puts the Federal Reserve in a difficult position, reducing the odds of rate cuts in the second quarter.
For traders, this environment of high uncertainty suggests a focus on interest rate volatility. With the Fed likely on hold but data becoming more erratic, options on SOFR futures could be valuable. Betting on a rise in volatility, rather than a specific direction in rates, allows for profiting from the market’s indecision over the next several weeks.
The yield curve also presents opportunities based on this view. A scenario where the Fed holds rates high to fight sticky inflation while economic growth softens is a classic recipe for a flattening or more inverted curve. We see value in positions that anticipate short-term rates remaining anchored while long-term yields fall on growth concerns.
Given this backdrop, implied volatility in the equity market looks relatively cheap. The VIX, currently hovering around 18, may not fully price in the risk of a policy error where the Fed keeps rates too high for a slowing economy. Buying protection or betting on a spike in volatility could be a prudent hedge against the growing economic crosscurrents.
