Yikes! The Federal Reserve's April and Quarterly Annualized Inflation Forecast Was Just Updated -- and It Isn't Pretty
Key Points
The benchmark S&P 500 and tech stock-driven Nasdaq Composite launched to record highs last week -- but their monumental run-ups may be put to the test by surging inflation.
Energy prices are skyrocketing in the wake of the Iran war's historic energy supply disruption.
A significant projected increase in inflation foreshadows trouble for a stock market that's been this pricey only once in the last 155 years.
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It's a bird! It's a plane! No, it's not Superman, either! It's the benchmark S&P 500 (SNPINDEX: ^GSPC) and tech stock-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) ascending to fresh record-closing highs, with the iconic Dow Jones Industrial Average (DJINDICES: ^DJI) one modest up day from joining the club.
Better-than-expected corporate earnings, coupled with the evolution of artificial intelligence, have created a launch pad scenario for the stock market. But this historic run-up is about to be put to the test, based on the latest inflation update from America's foremost financial institution, the Federal Reserve.
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Fed Chair Jerome Powell and the Federal Open Market Committee are navigating an unprecedented energy supply shock. Image source: Official Federal Reserve Photo.
The Iran war is roiling Wall Street
More than two months ago, on Feb. 28, President Donald Trump gave the order for U.S. military forces to begin attacks (along with Israel) against Iran. This led Iran to close the Strait of Hormuz to virtually all commercial shipping vessels, thereby choking off about 20% of the world's crude oil demand.
The law of supply and demand is straightforward: when an in-demand good is constrained, its price will rise until demand tapers off. Since the Iran war began, crude oil prices have soared to nearly four-year highs. As of this writing in the evening of April 30, West Texas Intermediate crude oil sits at almost $106 per barrel, up from $67/barrel when the war began.
Average U.S. gas prices per gallon on April 30, per AAA:
-- NBC News (@NBCNews) April 30, 2026
• Regular: $4.30 (⬆️ $1.32 since war in Iran began on Feb. 28)
• Premium: $5.16 (⬆️ $1.30 since war began)
• Diesel: $5.50 (⬆️ $1.74 since war began)
The impact on energy prices has been swift. Gas prices rose at their fastest pace in over 30 years, while diesel prices have climbed by a larger percentage than gasoline. The Iran war is undeniably pinching consumers' pocketbooks.
But this is just the first wave of a historic energy supply shock. Eventually, higher transportation and production costs will force businesses to act -- and that's where things can get dicey for the U.S. economy and stock market.
Image source: Getty Images.
The central bank just updated its inflation forecast
Before the start of the Iran war, trailing 12-month (TTM) U.S. inflation was 2.4% and moving toward the Federal Reserve's long-term inflation target of 2%. In March, factoring in the aforementioned energy supply disruption, U.S. TTM inflation soared 90 basis points to 3.3%.
On April 30, the Federal Reserve Bank of Cleveland updated its TTM inflation outlook for April and provided quarterly annualized Consumer Price Index (CPI) guidance.
The good news is that the Cleveland Fed's Inflation Nowcasting tool only expects TTM inflation to increase by 26 basis points to 3.56% in April. This is the same projection as one week ago, so things haven't worsened in this respect.
However, the quarterly annualized CPI for the second quarter jumped to 6.43% from 4.71% on April 20. In other words, projections suggest that inflation will be a nuisance for consumers and businesses for a longer period than initially anticipated.
Surging inflation is arguably the stock market's No. 1 headwind.
The S&P 500's CAPE Ratio has moved up to 40, its highest level since 2000 and now above 99% of historical valuations. $SPX pic.twitter.com/uhUt33SCp5
-- Charlie Bilello (@charliebilello) April 20, 2026
The stock market began 2026 at its second-priciest valuation since January 1871, according to the Shiller Price-to-Earnings (P/E) Ratio. S&P 500 Shiller P/E readings above 30 have historically foreshadowed eventual declines of 20% (or more) in the Dow, S&P 500, and/or Nasdaq Composite. The Shiller P/E is knocking on the doorstep of 41 to begin May.
The sizable uptick in inflation caused by the Iran war has effectively removed any hope of additional interest rate cuts in 2026. Without the prospect of lower lending rates to boost equities, Wall Street's major stock indexes may be vulnerable to a significant pullback.
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