Persistent inflation tied to tariffs and the Iran war is entering a new phase, threatening the gains that have carried the Dow, S&P 500, and Nasdaq under President Trump. Core price pressure has stayed stuck even as headline inflation eased, raising the risk of further rate hikes that could pressure Wall Street's AI-driven rally.
The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have risen 19%, 29%, and 39% since the start of President Trump's second term through the close on Sept. 22. But evidence is mounting that so-called Trumpflation, inflation driven by the president's tariff and energy policies, is becoming entrenched in the broader economy.
Tariffs and the Iran war are pushing up prices
Tariffs have pressured consumer prices for more than a year. After the Supreme Court voted 6-3 against Trump's use of tariffs under emergency powers in February, the administration replaced them with a temporary global duty, then in late July imposed tariffs ranging from 10% to 12.5% on more than 80 countries under the Trade Act of 1974.
Separately, Iran shut the Strait of Hormuz to maritime traffic after Trump authorized a strike on Feb. 28, halting the daily movement of roughly 20 million barrels of petroleum liquids. Gas prices then rose at the fastest pace in three decades, while diesel prices climbed to an all-time high.
Core inflation refuses to budge
Headline trailing-12-month inflation eased to 3.4% in August from a three-year high of 4.2% in May. However, Core PCE, which strips out food and energy, barely moved, slipping from 3.5% in May to 3.3% in June and July. That stickiness signals the price pressure has spread beyond energy into the wider economy, through pricier petroleum-based goods, altered shipping routes, and a fertilizer supply squeeze tied to the closed strait.
Inflation has now run above the Federal Reserve's 2% target for 66 consecutive months, a stretch that typically takes a sustained rate-hiking cycle to unwind.
The stakes for Wall Street's AI rally
The Federal Open Market Committee delivered a quarter-point rate increase on Sept. 16. If entrenched inflation forces the Fed to deliver several more hikes, it could slow the AI infrastructure build-out and pressure the valuations assigned to AI stocks in what the source calls the second-priciest stock market in history. The more entrenched Trumpflation becomes, the worse the outlook for Wall Street.
Source: Fool
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