Driven by President Donald Trump’s tariffs and the conflict involving Iran, Trumpflation has transitioned into a deeper, more persistent phase. Recent data reveals that core inflation remained steady near 3.3% throughout the summer, even as overall headline prices experienced a sharp decline.
This divergence between softening headline prices and stubborn core inflation highlights the core issue. It indicates that Trumpflation has moved past the gasoline pump and firmly rooted itself throughout the wider American economy.
Trumpflation’s Two-Front Inflation Problem
Following a defeat at the Supreme Court, President Trump brought back Section 301 tariffs under the Trade Act in July. Consequently, businesses have shifted the increased expenses of imported goods onto consumers.
Following the closure of the Strait of Hormuz by Iran in late February, approximately 20 million barrels of daily oil transit were halted, accounting for roughly 20% of global crude supplies.
Figures referenced by Barchart show that diesel costs reached a record peak of $6.50 per gallon in September. Additionally, because about one-third of the global fertilizer supply passes through this same strait, agricultural and food production expenses have likewise risen.
This persistence is evident in Core Personal Consumption Expenditures (PCE)—the Federal Reserve’s favored inflation metric—which leaves out fluctuating energy and food expenses.
Macro strategist Jim Bianco has pointed out that core PCE has stayed above the central bank’s 2% objective for 65 consecutive months. He contends this continuous run demonstrates that markets are overlooking the broader economic picture by focusing too narrowly on oil.
Why It Matters for Markets
Federal Open Market Committee (FOMC) Chair Kevin Warsh and his colleagues proceeded with a quarter-point rate hike on Sept. 16 regardless. Normally, entrenched inflation requires an extended series of rate increases to tame, rather than a solitary adjustment.
This situation presents a challenge for equity markets currently sitting at valuations not seen since the dot-com era, measured by the Shiller price-to-earnings ratio. Wall Street’s artificial intelligence-fueled advance has heavily anticipated consistent monetary easing in the future.
Should Trumpflation continue to compel the Fed to act, that optimistic wager could fall apart. Investors relying on lower borrowing costs may need to reevaluate the sustainability of the current market surge. Whether Fed Chair Warsh shares this perspective may become apparent during the upcoming meeting.