Trumpflation Is Evolving Into a 3-Headed Monster, and Wall Street Will End Up Paying the Price

For more than a century, the stock market has been the greatest wealth-creator on the planet. The average annual returns of the ageless Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and growth-stock-inspired Nasdaq Composite (NASDAQINDEX: ^IXIC) outpace the annualized returns of bonds, commodities, and real estate.

But the stock market is far from infallible. Over shorter timelines, corrections and bear markets are quite common.

At any given time, several headwinds are waiting in the wings to sink Wall Street. While historically high valuations and the prospect of an artificial intelligence (AI) bubble are perhaps the two most well-known, there's arguably no more perfect saboteur for Wall Street than inflation.

President Trump delivering remarks. Image source: Official White House Photo by Molly Riley.

Though some degree of inflation is normal and healthy -- i.e., businesses should possess some pricing power on their goods and services in a growing economy -- U.S. inflation is currently well above this target level. The blame for this above-average inflation, and the reason the Dow, S&P 500, and Nasdaq Composite can tumble from their respective all-time highs, lies with President Donald Trump.

Trump-driven inflation (i.e., Trumpflation) has evolved into a three-headed monster, and taming it will prove especially challenging for Fed Chair Kevin Warsh and his colleagues at the Federal Reserve.

A historic energy supply shock is driving up fuel prices

The primary driver of above-average inflation since February has been the Iran war. Not long after President Trump gave the U.S. military the green light to attack Iran, the latter closed the Strait of Hormuz to most maritime traffic. This decision stopped the daily transport of approximately 20 million barrels of petroleum liquids, resulting in the largest energy supply disruption in modern history.

If you own an internal combustion engine vehicle, you've felt the impact of this disruption firsthand. Within a matter of weeks, gas prices rose at the fastest pace in over 30 years, while diesel prices increased at an even steeper percentage. This breakneck jump in fuel prices almost singlehandedly pushed trailing 12-month (TTM) U.S. inflation from 2.4% in February to a three-year high of 4.2% in May.

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

In June, peace talks between the U.S. and Iran sent crude oil prices plunging and offered some relief at the fuel pump for consumers. Though fuel prices are known to rise like a rocket during supply shocks and fall like a feather once resolved, TTM inflation dipped to 3.5% in June.

However, optimism about peace talks was relatively short-lived. Conflict has escalated, yet again, in recent weeks, leading Iran to close the Strait of Hormuz to commercial vessels. Crude oil prices are climbing once again, which may result in a higher TTM headline inflation figure in July.

At the moment, there's no clear end in sight to this conflict or the historic energy supply disruption.

The inflationary effects of the Iran war have spilled into the broader economy

But Trumpflation is about much more than just rising energy prices. The second "head" of this monster is the evolution of the inflationary effects of the Iran war into a broad-based issue.

Whereas headline inflation has been whipsawed by rapid changes in energy prices, the Federal Reserve Bank of Cleveland's forecast for Core Personal Consumption Expenditures (PCE) is hardly budging. Core PCE excludes volatile food and energy costs, and is one of the Federal Reserve's favorite inflationary measures.

The Fed's preferred measure of inflation (Core PCE) moved up to 3.4% in May, the highest level since October 2023.

This was the 63rd consecutive reading above the Fed's 2% target level.

"We've missed for 5 years. And we're gonna fix that."-Kevin Warsh last week pic.twitter.com/Wtayfgt8sq

-- Charlie Bilello (@charliebilello) June 25, 2026

According to the Cleveland Fed's Inflation Nowcasting tool, Core PCE is expected to ease ever-so-slightly from a reported 3.4% in May to 3.33% in June (based on estimates from July 24). In July, it's projected to reaccelerate to 3.36%.

While these changes are minuscule in percentage terms, they indicate that the inflationary effects of the Iran war have spilled into the broader economy. For instance, businesses having to reroute shipments or alter supply chains incur added costs that are eventually passed on to consumers.

In addition to higher transportation and production costs, select input costs are climbing. Petroleum-based products, such as plastics and synthetic polymers, are becoming more expensive, resulting in higher costs for consumers.

Image source: Getty Images.

Trump's tariffs are back in the picture

The third aspect of Trumpflation is the president's tariff and trade policy.

Donald Trump initially unveiled sweeping global tariffs and higher reciprocal tariffs on dozens of countries in April 2025. Many of these tariffs were invalidated by a U.S. Supreme Court ruling in February 2026.

The president then instituted a sweeping 10% global tariff that had a 150-day statutory limit, per Section 122 of the Trade Act of 1974. With this temporary tariff now expired, the Trump administration announced a new round of tariffs last month, ranging from 10% to 12.5%, on 60 trade partners using Section 301 of the Trade Act of 1974.

Former Fed Chair Jerome Powell and the Federal Open Market Committee (FOMC) often singled out the inflationary effects of Trump's tariffs on the goods sector. However, the FOMC pointed to these tariffs as "pass-through" costs that were expected to dissipate (from an inflationary standpoint) in 2027. With new tariffs announced, the clock has once again restarted.

Adding duties to unfinished imported goods, such as steel, can increase production costs and drive up prices for consumers.

Trumpflation can devastate Wall Street

Fed Chair Kevin Warsh has been adamant that the FOMC will deliver price stability. Following 63 consecutive months with U.S. inflation topping the Fed's long-term 2% target, the prospect of policymakers taking action is becoming more likely.

There is now an 82% chance of a rate hike by the September FOMC Meeting 🚨 🚨 pic.twitter.com/m41iutPvCl

-- Barchart (@Barchart) July 25, 2026

Although the stock market has historically outperformed in rising-rate environments, there's reason to believe this time may be an exception.

Nothing is more imperative to Wall Street's success at the moment than the AI infrastructure build-out. While some of the stock market's most influential businesses are funding their data center expansions with cash on hand and positive operating cash flow, several companies are relying on debt financing. If borrowing becomes costlier, it can slow this expansion.

Normally, this wouldn't be a big deal. However, the stock market entered 2026 at its second-priciest valuation in history and has only gotten pricier as the year has rolled on. The stock market is priced for perfection and reliant on supercharged growth from AI infrastructure and applications. If this balancing act is disrupted by FOMC rate hikes driven by Trumpflation, it's Wall Street that'll end up paying the price.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.