Trumpflation Entrenches Itself in US Economy, Threatening Fed and Wall Street

The US economy and stock market have been experiencing unprecedented growth under President Donald Trump's policies. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite soared by 57%, 70%, and 142% respectively during his first term (Jan 20, 2017 - Jan 20, 2021). Since the start of his second term (Jan 20, 2025), these gains have continued with the Dow, S&P 500, and Nasdaq rising by 19%, 29%, and 39% respectively through September 22. However, cracks are forming in their foundations due to persistently elevated inflation.

Trumpflation has led to a three-year high of 4.2% trailing 12-month (TTM) inflation in May, more than double the Federal Reserve's long-term inflation target of 2%. Two of President Trump's policies - tariffs and the Iran war - are having a direct impact on consumer prices. Tariffs have been modestly affecting consumer prices for over a year, while the Iran war has had immediate consequences for energy markets.

Energy commodity prices have been at the center of wild swings in headline inflation since February. While the pass-through effects of tariffs were expected to wane in 2027, and energy supply disruptions are typically short-lived, things haven't gone as planned. The rollout of a new round of global tariffs in July further pushes out the year-over-year impact of duties on consumer prices.

Core Personal Consumption Expenditures (PCE), which excludes volatile food and energy costs, shows that Iran-war-driven inflation has reached the broader economy. This means entrenched inflation is a huge problem for Fed Chair Kevin Warsh and the Federal Open Market Committee (FOMC). It typically takes considerable time and a rate-hiking cycle to purge entrenched inflation.

The consequences of entrenched Trumpflation are dire for Wall Street's artificial intelligence (AI)-powered rally, which needs everything to go perfectly. If the FOMC delivers several additional rate hikes beyond the quarter-point interest rate increase on September 16, it could slow the AI infrastructure build-out and force investors to rethink the otherworldly valuations assigned to AI stocks.