Federal Reserve's August Inflation Forecast Hides a Red Flag for Wall Street

The Federal Reserve's initial August inflation forecast has been released, and it contains a red flag that could come back to bite Wall Street.

Despite recent record highs for the Dow Jones Industrial Average and S&P 500, inflationary worries are mounting. The Federal Reserve Bank of Cleveland's Inflation Nowcasting tool projects a third straight month of easing for headline inflation in August, with a forecast decline from 3.5% in June to 3.22% in August.

However, the price stickiness of Core Personal Consumption Expenditures (PCE) suggests that Iran-war-driven inflation has become far more entrenched. The Cleveland Fed's August inflation forecast highlights this disturbing trend: while headline inflation could fall a full percentage point between May and August, based on the latest Cleveland Fed forecast, Core PCE is expected to hold steady at 3.31% in July before reaccelerating to 3.36% in August.

The FOMC's favorite inflationary measure has historically been one of its most reliable indicators, and this development suggests that Iran-war-driven inflation is no longer just an energy-supply disruption issue. The impacts of the conflict are reaching the broader economy, with altered shipping routes, new suppliers, and higher costs for select goods hitting consumers in their pocketbooks.