Buckle Up! The Federal Reserve’s May Inflation Forecast Points to Fireworks on Wall Street.
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Buckle Up! The Federal Reserve’s May Inflation Forecast Points to Fireworks on Wall Street.
08 mins
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New Fed Chair Kevin Warsh is taking over amid a historic energy price shock. Image source: Official White House Photo by Daniel Torok.
The inflationary effects of the Iran war may be lasting
Although now-former Fed Chair Jerome Powell frequently cited President Donald Trump’s tariffs as a source of elevated inflation, it’s the president’s decision to attack Iran that has led to a noticeable increase in prices.
Shortly after Trump gave the order for the U.S. military to attack on Feb. 28, Iran closed the Strait of Hormuz to virtually all commercial vessels. This tactic effectively halted the movement of 20 million barrels of petroleum liquids per day (about 20% of global demand).
Removing a fifth of the world’s crude oil supply has had a significant impact on energy prices. U.S. consumers have witnessed gas prices rise at the fastest pace in over three decades.
The concern is that energy price shocks typically have multiple stages. While it’s not uncommon for higher prices at the fuel pump to dominate news headlines, it’s the potentially damaging effects of inflation on transportation and production costs for businesses that can further increase inflation.
Even though President Trump has claimed that Iran war-driven inflation will be short-term, historical precedent points to prices remaining higher for longer.
Image source: Getty Images.
The latest May inflation forecast is in — and it remains worrisome
According to the newest update from the Federal Reserve Bank of Cleveland’s Inflation Nowcasting tool, inflation is expected to worsen. The Cleveland Fed’s inflation forecast adjusts daily, Monday through Friday, as new economic data is released.
While the small silver lining for the stock market is that the Cleveland Fed’s May inflation forecast is unchanged from the previous week, the 4.18% trailing 12-month (TTM) estimate that ends in May is 38 basis points higher than the 3.8% TTM inflation rate reported in April and 178 basis points above the 2.4% TTM inflation rate in February.
Inflation forecasts take on heightened importance with new Fed Chair Kevin Warsh steering the ship. Trump’s handpicked successor to Powell has a Federal Open Market Committee (FOMC) voting history that leans decisively hawkish.
In other words, Warsh has consistently favored higher interest rates as a tool to suppress inflation. With inflation in May projected to hit a three-year high, the new Fed chair may be among the most vocal advocates to shift the FOMC’s monetary strategy.
Inflation is also rising as the stock market reaches its second-priciest valuation over 155 years, according to the S&P 500’s Shiller Price-to-Earnings Ratio. With rate cuts all but removed from the picture, investors will be forced to come to terms with the possibility that higher interest rates could stymie the debt financing that’s fueling the AI data center build-out.
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