It’s shaping up to be another sensational year for equities. In early June, the Dow Jones Industrial Average (^DJI 0.03%), S&P 500 (^GSPC 0.22%), and Nasdaq Composite (^IXIC 0.66%) romped to record highs on the heels of artificial intelligence (AI) euphoria.
But this rally may be more fragile than Wall Street’s major indexes suggest. Inflation is the proverbial torpedo that can sink Wall Street’s ship, and we appear to have entered the next phase of Trumpflation.
Inflation has soared on the heels of two of Donald Trump’s policies. Image source: Official White House Photo by Molly Riley.
Two trump decisions have pushed U.S. inflation to a three-year high
To preface this discussion, a modest level of inflation is normal and healthy for the U.S. economy. But when prices rise quickly or move beyond subjective “modest” levels, it can upend the economy and/or the stock market. As of May 2026, U.S. inflation is at a three-year high.
The bulk of this year’s inflationary surge has been driven by two decisions from President Donald Trump (i.e., “Trumpflation”). The first policy, implementing sweeping global tariffs, has placed modest upward pressure on prices for select goods.
BREAKING: May CPI inflation rises to 4.2%, the highest level since April 2023.
Core CPI inflation also rises to 2.9%, the highest since September 2025.
Inflation in the US is officially back above 4% and more than double the Fed’s target.
Odds of Fed rate hikes are rising.
— The Kobeissi Letter (@KobeissiLetter) June 10, 2026
However, the primary catalyst behind inflation’s jump from 2.4% in February to 4.2% in May is the Trump-led Iran war. Shortly after the president approved military operations against Iran, the latter closed the Strait of Hormuz to commercial vessels. This action crippled the daily flow of approximately 20 million barrels of petroleum liquids.
The reaction in energy markets was impossible to miss, with gas prices climbing at the fastest pace in over three decades and diesel prices rising by an even steeper percentage.
Image source: Getty Images.
Caveat emptor: We’re entering the next phase of Trumpflation
President Trump has repeatedly opined that an end to the Iran war would cause fuel prices to crater and send U.S. inflation down in a hurry. But based on the latest economic data, this isn’t what’s happening.
Recent peace talks between the U.S. and Iran have outlined a path toward peace, causing crude oil prices to retrace to levels last seen in the initial days of the Iran war. According to the Federal Reserve Bank of Cleveland’s Inflation Nowcasting tool, trailing 12-month inflation for June is projected to decline to 3.96% (from 4.2% in May).
BREAKING: US May PCE inflation, the Fed’s preferred inflation metric, rises to 4.1%, the highest reading since April 2023.
Core PCE inflation rose to 3.4%, its highest since October 2023.
US inflation is now officially running at more than double the Fed’s 2% target.
— The Kobeissi Letter (@KobeissiLetter) June 25, 2026
While the headline inflation figure should ease a bit in June, Core Personal Consumption Expenditures (PCE), which excludes volatile food and energy costs, continues to climb. This persistent incline in Core PCE implies that the pricing pressures caused by the Iran war have spilled over into the broader economy. The impacts of higher transportation and production costs are filtering into goods and services, marking the next phase of Trumpflation.
Even with crude oil prices well off their recent highs, the probability of the Federal Reserve hiking interest rates is rising. According to the quarterly filed Summary of Economic Projections, nine of the 18 Federal Open Market Committee (FOMC) members who submitted interest rate forecasts believe the federal funds target rate will be higher by the end of 2026, signaling at least one rate hike.
Trumpflation may put an end to the Dow’s, S&P 500’s, and Nasdaq Composite’s historic rallies. If the FOMC does raise rates, it’ll make the AI data center build-out costlier and put the stock market’s expensive valuation premiums under a microscope.
