Trumpflation and AI Fuel Higher Inflation Despite Rate Hike
The Federal Reserve has started its fourth rate-hiking cycle since the start of the century, increasing the federal funds target rate by 25 basis points to 3.75%-4.00%. This move was met with a decline in Wall Street's major stock indexes, including the Dow Jones Industrial Average (DJI), S&P 500 (^GSPC), and Nasdaq Composite (^IXIC).
President Donald Trump expressed his disapproval of the rate hike, stating that the Federal Reserve 'is very hostile. They're very political. They're doing the wrong thing.' However, he appears to be ignoring two significant inflation drivers.
The first is Trumpflation, or inflation caused by the president's policies. The administration reinstated tariffs on more than 80 countries in July, increasing domestic manufacturing costs and leading to higher prices for consumers. Additionally, the Iran war has resulted in a meaningful impact on consumer prices, particularly with fuel prices rising due to the Strait of Hormuz closure.
The second driver is the inflationary effects of the artificial intelligence (AI) infrastructure build-out. The AI data center build-out is lifting corporate growth rates and fueling innovative spending, but persistent AI hardware supply shortages have given AI companies otherworldly pricing power, leading to higher prices for consumers.