Trumpflation Is a Problem for Fed Chair Kevin Warsh, but It's Not the Only Serious Inflationary Threat

It's been a year packed with resiliency and change on Wall Street. On the one hand, we've watched the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC) sweep multiple headwinds under the rug and scamper to several record highs.

At the other end of the spectrum is President Donald Trump's handpicked successor to Jerome Powell, Kevin Warsh, who took the reins as head of the Federal Reserve on May 22. Warsh became Fed chair right as the prevailing U.S. inflation rate reached a three-year high of 4.2%.

Based on his voting record as a former member of the Board of Governors from Feb. 24, 2006, to March 31, 2011, Warsh can be viewed as a monetary hawk, and he's wasted no time outlining an inflation ultimatum. While delivering his first Jackson Hole economic symposium speech on Aug. 28, Warsh stated:

We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed.

Trumpflation isn't the only issue Fed Chair Kevin Warsh will have to tackle. Image source: Official White House Photo by Daniel Torok.

But there's a lot of work to be done on the inflation front, courtesy of Trumpflation and another recently named nefarious source of higher prices.

Trumpflation is becoming entrenched in the U.S. economy

A modest level of inflation is expected and healthy for an expanding economy. When consumer demand for goods and services is robust, businesses should possess some degree of pricing power, leading to modest inflation.

Trumpflation (i.e., inflation that's specifically driven by President Trump's policies) has lifted the prevailing inflation rate well above "modest" levels.

BREAKING: US July PCE inflation, the Fed's preferred inflation metric, hits 3.7%, above expectations of 3.6%.

Core PCE inflation was 3.3%, the second highest reading since October 2024.

US inflation continues to run at nearly double the Fed's 2.0% target.

Own assets or be left…

— The Kobeissi Letter (@KobeissiLetter) August 26, 2026

To begin with, Trump's tariff and trade policy is boosting consumer prices. Adding duties to unfinished imported goods, such as steel, can increase domestic manufacturing costs, which are then passed on to consumers.

But the primary source of Trumpflation has been the Iran war. The virtual closure of the Strait of Hormuz for six months (and counting) has led to the largest modern-day energy supply disruption. In addition to higher fuel prices, the price stickiness of Core Personal Consumption Expenditures suggests that Iran-war-driven inflation has spilled over into the broader economy.

Combatting entrenched Trumpflation will be challenging for Kevin Warsh -- but it's not his only inflationary concern.

Image source: Getty Images.

The stock market's No. 1 catalyst, AI, is fueling higher prices

Since Warsh became Fed chair, several changes have been made, including the end of forward-looking guidance in Federal Open Market Committee (FOMC) meeting statements. But perhaps the biggest shift was observed in the FOMC's June meeting minutes, which, for the first time, assigned some of the blame for elevated inflation to the artificial intelligence (AI) revolution:

Core goods price inflation had risen relative to a year earlier, which the staff judged as largely reflecting the effects of tariffs and AI-related pricing pressures.

While seemingly insatiable demand for graphics processing units, memory and storage solutions, and rack servers has given select AI hardware companies otherworldly pricing power, these higher costs are working their way down the chain to consumers and lifting the prevailing inflation rate.

Fed now officially blaming AI for rise in core inflation:

"Core goods price inflation had risen relative to a year earlier, which the staff judged as largely reflecting the effects of tariffs and AI-related price pressures"
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"Some participants remarked that productivity… https://t.co/ne8TnjRV8s

— zerohedge (@zerohedge) July 8, 2026

Most FOMC policymakers, including Warsh, believe AI will boost economic output and be disinflationary over time. However, it'll likely take several years for businesses to optimize AI solutions and maximize sales and profits. This leaves the door wide open for the AI revolution to light a fire under already elevated inflation.

If Warsh and the FOMC end up raising interest rates to deliver on their mandate of price stability, it could slow the partially debt-financed AI infrastructure expansion and halt Wall Street's bull market in its tracks.

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.