On Sept. 16, for only the fourth time this century, the Federal Reserve kicked off a rate-hiking cycle. Fed Chair Kevin Warsh and his colleagues had little choice but to tackle persistently elevated inflation — 66 months above the Fed’s long-term target of 2% (and counting) — head-on. The Federal Open Market Committee (FOMC) raised the federal funds target rate by 25 basis points to 3.75%-4.00%.
Unfortunately, inflationary pressures are far from over, and that’s potentially terrible news for Wall Street and its major stock indexes, the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC).
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Fed Chair Kevin Warsh and his colleagues may be just getting started in their fight against inflation. Image source: Official Federal Reserve Photo.
The latest September inflation update offers a worrisome outlook
Even though the September inflation data won’t be released until Oct. 14, the Federal Reserve Bank of Cleveland’s proprietary Inflation Nowcasting tool provides updated projections after the release of relevant economic data. As of the latest update on Sept. 25, things appear to be worsening.
Headline inflation for August clocked in at 3.4%, according to the U.S. Bureau of Labor Statistics. However, the Cleveland Fed expects the Consumer Price Index (CPI) to jump to 3.57% on an annualized basis in September.
It’s an even direr outlook for Personal Consumption Expenditures (PCE), one of the central bank’s preferred inflation measures. PCE accounts for the substitution effect (i.e., consumers trading down to cheaper goods) and includes third-party payments made on behalf of consumers. This makes it a more encompassing inflationary measure than the CPI.
The Inflation Nowcasting tool is forecasting an annualized PCE of 3.78% in August and 3.97% in September, up from a reported 3.7% in July.
Image source: Getty Images.
News flash: Energy isn’t the only driver of inflation
The lion’s share of this elevated inflation can be traced to President Donald Trump’s policies. More specifically, the Iran war.
Since fighting commenced seven months ago, the near-persistent closure of the Strait of Hormuz has stymied the daily flow of approximately 20 million barrels of petroleum liquids. The largest energy supply disruption in modern history has sent gas and diesel prices soaring.
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However, the Iran war isn’t just an energy issue any longer. As Trumpflation (inflation specifically driven by Trump’s policies) has evolved, so have the impacts of Iran-war-driven inflation.
For example, businesses have been forced to alter their modes of transportation, change shipping routes, alter their suppliers, and pay more for petroleum-based goods, such as plastics, due to the closure of the Strait of Hormuz. These added costs, plus several others not mentioned, have reached the broader economy and are directly impacting consumers’ wallets.
According to the Cleveland Fed, Core PCE, which excludes volatile food and energy costs, is expected to tick up from a reported 3.3% in July to an estimated 3.4% in August and 3.49% in September.
As Trumpflation digs in its heels, Fed Chair Warsh and the FOMC are likely to get more aggressive with interest-rate hikes. That’s bad news for Wall Street.
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Uh-Oh! The Latest September Inflation Forecast Spells Trouble for Wall Street, and It’s Not Just Energy Prices to Blame. was originally published by The Motley Fool