Trumpflation Entrenches as Core Inflation Defies Headline Price Decline

The US economy is facing an entrenched phase of inflation tied to President Donald Trump's tariffs and the Iran war, known as 'Trumpflation'. Despite a sharp decline in headline prices, core inflation has held near 3.3% throughout the summer. This discrepancy between falling headline prices and stubborn core inflation suggests that Trumpflation has spread beyond the gas pump and taken root in the broader US economy.

Businesses have passed on the higher costs of imported materials to consumers due to reinstated tariffs under Section 301 of the Trade Act, which President Trump reactivated months after a Supreme Court defeat. The Iran war also had a significant impact, with the Strait of Hormuz being closed in late February, cutting off roughly 20 million barrels of daily oil traffic, about a fifth of the world's crude oil supply.

Diesel prices hit an all-time high of $6.50 a gallon in September, according to data cited by Barchart, while the strait also carries roughly a third of the world's fertilizer supply, leading to increased crop and produce costs. This stickiness is evident in Core Personal Consumption Expenditures (PCE), the Federal Reserve's preferred inflation gauge.

Macro strategist Jim Bianco has noted that core PCE has held above the Fed's 2% target for 65 straight months, indicating that markets may be missing the bigger story by fixating on oil prices. This is a concern for a stock market trading near its richest valuation since the dot-com bubble.

The Federal Reserve raised interest rates a quarter point on September 16, but entrenched inflation typically takes a prolonged hiking cycle to unwind, not just one move. If Trumpflation continues to force the Fed's hand, this could unravel the current rally, as investors banking on cheaper money may need to rethink how long it can last.