Key Points
Although the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have been virtually unstoppable, elevated inflation has become a serious problem for stocks.
The Cleveland Fed’s proprietary Inflation Nowcasting tool expects several closely watched inflation measures to reaccelerate in November.
Rapidly rising inflation may force the Fed to get more aggressive with rate hikes, which is a worst-case scenario for the stock market’s debt-financed artificial intelligence (AI) infrastructure build-out.
Over the last four years, the ageless Dow Jones Industrial Average (DJINDICES:^DJI), broad-based S&P 500 (SNPINDEX:^GSPC), and growth-focused Nasdaq Composite (NASDAQINDEX:^IXIC) have been virtually unstoppable. The artificial intelligence (AI) data center build-out has fueled an investing frenzy similar to what was witnessed in the mid-to-late 1990s with the internet.
But the stock market isn't without headwinds. Arguably, the biggest obstacle to the continuity of this bull market rally is persistently elevated inflation. The bad news for investors is that the Federal Reserve's initial inflation forecast for November shows things are getting downright ugly for Wall Street.
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Fed Chair Kevin Warsh and his colleagues may need to get more aggressive with rate hikes. Image source: Official Federal Reserve Photo.
Uh-Oh! Inflation appears to be reaccelerating.
Though there's no perfect inflation prediction tool, the Federal Reserve Bank of Cleveland's Inflation Nowcasting tool does an exceptional job of accounting for new economic data and adjusting inflation forecasts in real time.
On Nov. 2, Wall Street got its first look at the initial November inflation forecast and the latest update on the October figures.
The broad-based Consumer Price Index (CPI) is projected to creep slightly higher to 3.74% in October, before exploding to an annualized 4.25% in November. But what's even more unnerving is the expected jump in Personal Consumption Expenditures (PCE) and Core PCE – the latter excludes volatile food and energy costs. PCE is the Federal Reserve's preferred inflation gauge.
BREAKING: US September PCE inflation, the Fed's preferred inflation metric, rises to 3.6%. Core PCE inflation also rose to 3.1%, up +0.3% month-over-month. This officially confirms that CPI, PPI, and PCE inflation are all rising again. A December rate hike is coming.
— The Kobeissi Letter (@KobeissiLetter) October 29, 2026
The Cleveland Fed's Inflation Nowcasting tool predicts PCE will jump from a reported 3.6% in September to 3.77% in October and 4.03% in November. Meanwhile, Core PCE is expected to trudge higher from a reported 3.1% in September to 3.2% in October and 3.31% in November.
In other words, Trumpflation (inflation driven by President Donald Trump's policies) appears to be worsening, which is terrible news for the stock market.
Image source: Getty Images.
Trumpflation is entrenched in the U.S. economy
While a modest level of inflation is expected in an expanding economy, two of President Trump's policies -- tariffs and the Iran war -- have increased inflation above historic norms.
According to a newly released report by three New York Federal Reserve economists writing for Liberty Street Economics, the president's 2025 tariffs are estimated to have increased goods price inflation by 2.9 percentage points by February 2026. The tariffs, higher domestic production costs, and U.S. manufacturers raising their prices in instances when imported goods were notably costlier all contributed to higher inflation.
New from the New York Fed: "By February 2026, tariffs had contributed 2.9 pp to goods price inflation, and without them goods prices would have fallen slightly." About one quarter of every point in higher tariff rates shows up in consumer prices within one year. • A 10% across-the-board tariff yields a 2.6% rise in consumer goods prices after one year. • About two thirds of the increase comes from pricier imports, which get passed through quickly. • Another third comes from U.S. made goods, as producers face higher input costs and less import competition. This takes longer, about 6-12 months, to filter through.
— Nick Timiraos (@NickTimiraos) October 6, 2026
The Trump-led Iran war has resulted in an eight-month (and counting) closure of the Strait of Hormuz, which has effectively halted the flow of a fifth of the world's crude oil supply. Gas and diesel prices have skyrocketed following this closure.
We're also beginning to see evidence (i.e., the steady rise in Core PCE) that Iran-war-driven inflation has reached the broader U.S. economy. Businesses are being forced to adjust their supply chains, with these added costs passed on to consumers.
The more Trumpflation becomes entrenched in the U.S. economy, the more likely it is that Fed Chair Kevin Warsh and the Federal Open Market Committee (FOMC) will get more aggressive with rate hikes. This is a potential worst-case scenario for an expensive stock market that's been fueled, in part, by the debt-financed AI infrastructure build-out. If the AI expansion slows, even marginally, it may spell disaster for Wall Street's four-year rally.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.