The Federal Reserve's April Inflation Forecast Is In -- and It Just Keeps Getting Worse for Wall Street

For much of the previous seven years, the stock market thrived. Except for 2022, the benchmark S&P 500 (SNPINDEX: ^GSPC) delivered two separate three-year stretches (2019-2021, 2023-2025) during which it gained at least 16% annually. We've also witnessed the ageless Dow Jones Industrial Average (DJINDICES: ^DJI) and growth-oriented Nasdaq Composite (NASDAQINDEX: ^IXIC) romp to several record-closing highs.

But things have been far dicier for the stock market over the last seven weeks. Uncertainties stemming from the Iran war briefly sent the Dow and Nasdaq into correction territory.

However, it's not what's happening on the battlefield that's roiling Wall Street. Rather, it's the impact on U.S. inflation that's threatening to upend a 3.5-year-old S&P 500 bull market.

Fed Chair Jerome Powell delivering remarks. Image source: Official Federal Reserve Photo.

A historic energy supply disruption can't be swept under the rug

Starting Feb. 28, the U.S. and Israel began military operations against Iran. Shortly after this conflict commenced, Iran closed the Strait of Hormuz to virtually all oil shipping traffic. According to the Energy Information Administration, approximately 20 million barrels of liquid petroleum traverse the Strait of Hormuz daily, representing 20% of the world's demand.

As you can imagine, removing up to 20% of the world's crude oil supply in an instant has had a meaningful impact on energy prices. West Texas Intermediate crude oil surged as much as 79% per barrel, leading to some unsightly increases in fuel prices at home.

Gas prices in the US have moved up to $4.14 per gallon, their highest level since August 2022. The 39% spike over the last 5 weeks ($2.98/gallon to $4.124gallon) is the biggest we've seen in the past 30 years.

Video: https://t.co/eVzYroF7sD pic.twitter.com/9FSIqB6AKB

-- Charlie Bilello (@charliebilello) April 7, 2026

According to data from AAA, the national average price for a gallon of regular gas has jumped about 40% over the last five weeks to $4.16 (as of April 8). The increase is even more pronounced for diesel, which has jumped to $5.67 per gallon.

While rising fuel costs can translate into less discretionary spending for consumers, the bigger concern is how higher energy prices are adversely impacting transportation and production costs for businesses. It's this inflationary impact that's a potential nightmare scenario for the stock market.

Image source: Getty Images.

The Fed's April inflation forecast is nightmare fuel for a historically expensive stock market

Although inflation forecasts are fluid and are subject to change following the release of key economic reports, the Federal Reserve Bank of Cleveland's inflation projections for April have been consistently moving in the wrong direction.

As of April 2, the Cleveland Fed's Inflation Nowcasting tool was looking for trailing 12-month (TTM) U.S. inflation to reach 3.25% in April. A few days later, the forecast had climbed to 3.38%. Through April 8, this prognostication is now up to 3.56%. If this figure proves accurate, we'd be looking at a 116-basis-point increase in the TTM inflation rate over two months (from 2.40% in February to 3.56% in April).

Monthly #PCE inflation data will be released tomorrow. Our #inflation nowcasting model (updated daily!) predicts year-over-year PCE #inflation of 2.67% for February. Check it out: https://t.co/qXCmAZQfCn pic.twitter.com/7pEsoozbHq

-- Cleveland Fed (@ClevelandFed) April 8, 2026

Investors have been counting on and pricing in additional interest rate cuts for 2026. Lower lending rates are expected to fuel artificial intelligence (AI) data center expansion, acquisitions, and ongoing game-changing innovations.

But if U.S. inflation spikes to 3.56%, there would be virtually no incentive for the Federal Open Market Committee (the 12-person body, including Fed Chair Jerome Powell, responsible for setting the nation's monetary policy) to lower interest rates. There may even be tangible reasons to raise interest rates before the end of the year.

With the stock market entering 2026 at its second-priciest valuation multiple since January 1871, equities simply have no room for error. Fed inflation forecasts moving persistently higher is a worst-case scenario that could make an expensive stock market highly vulnerable to downside.

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.