Trumpflation could threaten Wall Street’s bull market: How the Iran war is keeping inflation high

The strong stock-market performance has continued during Trump’s second term. The biggest driver behind the gains has been the rapid growth of artificial intelligence (AI), which has pushed many technology and AI-related stocks higher, according to The Motley Fool. But Trump’s policies have also created problems for consumers and Wall Street. His tariff and trade policies have increased duties on some imported goods, raising costs for businesses and pushing up prices for consumers.

The Strait of Hormuz is one of the world’s most important energy routes. The shutdown effectively stopped the movement of about 20 million barrels of petroleum liquids, equal to roughly one-fifth of global oil demand. That made the Iran war one of the biggest energy supply disruptions in modern history. Removing such a large amount of oil and petroleum supply from global markets caused energy prices to jump sharply.

Oil prices rose more than 70% within weeks of the disruption. Fuel prices also climbed rapidly as the supply shock moved through energy markets. US drivers quickly felt the impact. Gasoline and diesel became more expensive, putting additional pressure on household budgets, especially for people who rely heavily on cars. The increase in energy prices also pushed overall inflation higher. Between February and May, 12-month inflation jumped from 2.4% to 4.2%, reaching its highest level in three years, according to The Motley Fool.

Crude prices eased as hopes grew that the US and Iran could move toward peace talks. But lower oil prices may not immediately mean lower prices at the pump. Fuel prices often rise very quickly when supply is disrupted but take much longer to fall after the disruption ends.

That means even a peace deal may not immediately erase the inflation caused by the energy shock. If the Strait of Hormuz reopens, consumers could still face higher fuel prices for some time. Trump has argued that inflation will fall once the Iran war ends. But there are signs that the inflation problem is now moving beyond oil and gasoline.

Core PCE reached 3.4% in May. That was its highest level since October 2023, according to The Motley Fool. The important point is that core inflation is not falling as quickly as headline inflation. This suggests that the problem is no longer limited to expensive oil and gasoline.

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The Cleveland Federal Reserve’s Inflation Nowcasting tool expects headline inflation to fall further. Its forecast sees headline inflation declining from 4.2% in May to about 3.22% in August. But the outlook for core PCE is much less encouraging. The Cleveland Fed’s August forecast puts core PCE at about 3.36%, only a small improvement from May’s 3.4%. This is an important warning for Wall Street. If core inflation remains high even as energy prices cool, the Iran war may be creating longer-lasting inflation across the economy.

The Strait of Hormuz is also important for the global fertilizer market. About one-third of the world’s fertilizer passes through the narrow waterway. A disruption in fertilizer supplies could hurt agriculture. Fertilizer shortages can reduce crop yields and increase the cost of producing food. That could eventually mean higher grocery bills for American consumers. If farmers face higher fertilizer costs or lower supplies, those costs can move through the food supply chain and reach supermarkets.

Businesses facing higher production costs may pass those increases on to customers. The Iran war is also disrupting helium supplies. Helium is important for semiconductor manufacturing because it is used for cooling and purging during chip production.

Qatar is a major part of the global helium supply chain. The country provides more than one-third of the world’s refined helium. That creates another possible pressure point for the technology industry. If helium supplies remain disrupted or become more expensive, semiconductor manufacturers could face higher production costs.

This is where “Trumpflation” could become a bigger problem. The term refers to inflationary pressure linked to policies and economic disruptions during Trump’s presidency, with the Iran war now adding another major source of price pressure. Persistent inflation could put the Federal Reserve in a difficult position. If prices remain high, Fed policymakers may not be able to simply wait for inflation to fall on its own.

Companies would have to pay more to finance their operations, investments and expansion plans. The AI industry could be particularly exposed. Many companies are spending huge amounts of money building AI infrastructure, and some of that expansion is being financed with debt.

More expensive borrowing could slow the AI investment boom. If financing becomes more costly, companies may delay or reduce spending on data centers, chips and other AI infrastructure. That could also hurt expensive AI-related stocks.

If investors begin to believe that AI growth will slow, they could reassess the high valuations attached to companies that have driven much of the stock-market rally. A fall in premium AI stock valuations could hit the broader market. AI-related companies have played a major role in lifting the S&P 500 and Nasdaq, so a major slowdown in these stocks could weigh on Wall Street.

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It also creates a risk for Wall Street’s bull market. If inflation remains high and the Fed has to keep rates higher or raise them again, investors could become less willing to pay very high prices for growth stocks.

The central warning is coming from core inflation rather than headline inflation. Headline inflation has started to cool, but the Cleveland Fed’s forecast suggests core PCE could remain around 3.36% in August, according to The Motley Fool.

That means the inflation problem may be changing rather than disappearing. The initial shock came from oil and fuel, but supply-chain disruptions and higher production costs are now creating pressure in other parts of the economy.

For consumers, that could mean higher prices for more than just gasoline. Food, manufactured goods and other products could become more expensive if companies continue passing higher costs through to customers. For the Federal Reserve, the challenge is even bigger.

Policymakers must balance the need to control inflation against the risk that higher interest rates could slow economic growth and investment. For Wall Street, the stakes are high because the stock-market rally depends heavily on strong AI growth and favorable financial conditions. If inflation forces interest rates higher, both parts of that equation could come under pressure.

If inflation falls quickly after the conflict and supply routes normalize, the pressure on the Fed and markets could ease. But if core inflation stays high, Wall Street could face a much tougher environment. Higher rates, more expensive borrowing and lower valuations could threaten the strong gains that investors have enjoyed under Trump.

That is why the rise in core PCE is being treated as a wake-up call. The Motley Fool says the latest inflation trends should be a warning for both Wall Street and Federal Reserve policymakers. The bigger story is no longer simply “oil prices are high because of the Iran war.” The concern is that the conflict is creating a wider inflation problem that could survive even after energy markets begin to recover.

If that happens, “Trumpflation” could become a serious threat to the US stock market’s historic bull run. The combination of sticky inflation, possible higher interest rates and pressure on AI investment could make it harder for the Dow, S&P 500 and Nasdaq to maintain their recent gains.