'Trumpflation' Rises: Inflation Fears Threaten Wall Street's Record Rally

Wall Street's recent rally is facing new challenges due to rising inflation concerns. The main worry among market participants is 'Trumpflation', which refers to price pressures linked to trade, energy, and foreign policy proposals. This has raised fears that the Federal Reserve may have to keep interest rates tight or even raise them again.

Inflation had cooled earlier, but trailing 12-month inflation rose from 2.4% in February to 4.2% in May before easing to 3.5% in June. However, core personal consumption expenditure inflation, which excludes food and energy, remained sticky at 3.3% in June.

Tariffs, geopolitical risks, and the artificial intelligence boom are all contributing to inflationary pressures. Tariffs can raise costs for companies that import goods and components, while AI is driving up demand for chips, servers, power, data centres, and related infrastructure.

The Federal Reserve Bank of Cleveland's Inflation Nowcasting tool indicates core PCE could remain around 3.3% in July, still above the Fed's 2% inflation target. The risk for stocks is not just inflation itself but also the Fed's response to it.