Iran-War Driven Inflation Persists, Threatening Fed Rate Hikes

The Federal Reserve Bank of Cleveland's Inflation Nowcasting tool has projected a third consecutive month of easing for headline inflation in August, but a closer look at Core Personal Consumption Expenditures (PCE) reveals a disturbing trend.

Headline inflation dipped to 3.5% in June and is expected to decline further to 3.22% in August, according to the Cleveland Fed's forecast. This projected drop may prompt the Federal Open Market Committee (FOMC) to reconsider hiking interest rates.

However, Core PCE, which excludes volatile food and energy costs, has shown price stickiness, holding steady at 3.31% in July before reaccelerating to 3.36% in August. This suggests that Iran-war-driven inflation is no longer just an energy-supply disruption issue but is impacting the broader economy.

The FOMC's preferred measure of Core PCE has historically been a key indicator of inflationary pressures, and its persistence despite a forecast decline in headline inflation leaves rate hikes on the table. If the Fed does raise interest rates, it could slow or stall the partially debt-financed artificial intelligence data center build-out that's propelled major indices to fresh highs.