Oil Prices Are Plunging, but Trumpflation Is Getting Worse -- Here's Why

On the surface, everything appears to be humming along for Wall Street. The timeless Dow Jones Industrial Average (^DJI +0.28%) vaulted to a fresh all-time high in early July, while the benchmark S&P 500 (^GSPC +0.42%) and growth-focused Nasdaq Composite (^IXIC +0.29%) accomplished similar feats in June.

But if you dig beneath the headlines, you'll discover that Wall Street's historic rally isn't as rock-solid as the major indexes make it appear.

President Trump delivering remarks. Image source: Official White House Photo by Daniel Torok.

Inflation -- more specifically, rising prices driven by President Donald Trump's policies (i.e., "Trumpflation") -- has become a serious concern for equity markets. The U.S. trailing 12-month (TTM) inflation rate reached a three-year high of 4.2% in May.

Although crude oil prices have plunged significantly from recent highs, Trumpflation continues to worsen -- and there are a few valid reasons behind this trend.

President Trump's policies created two concurrent price shocks

To be clear, not all inflation is attributable to the president. A modest level of inflation is healthy and fully expected in an expanding economy. In other words, businesses should have some degree of pricing power for their products and services.

However, two decisions by President Trump have increased prices and lifted the prevailing inflation rate above modest levels.

Firstly, in April 2025, the president implemented sweeping global tariffs and higher reciprocal tariffs on countries deemed to have unfavorable trade imbalances with America. Even though the U.S. Supreme Court invalidated many of these tariffs in a February 2026 ruling, Trump used another justification to reinstate sweeping global tariffs shortly thereafter. Adding duties to unfinished imported goods is a recipe for higher prices for the American public.

BREAKING: May CPI inflation rises to 4.2%, the highest level since April 2023.

Core CPI inflation also rises to 2.9%, the highest since September 2025.

Inflation in the US is officially back above 4% and more than double the Fed's target.

Odds of Fed rate hikes are rising.

-- The Kobeissi Letter (@KobeissiLetter) June 10, 2026

But the far greater impact on inflation comes courtesy of the Trump-led Iran war. On Feb. 28, Trump gave the order for military operations to commence against Iran. In response, Iran shuttered the Strait of Hormuz, choking off the daily transport of approximately 20 million barrels of petroleum liquids.

Energy markets reacted quickly to the largest modern-day energy supply disruption. Gas prices rose at the fastest pace in over three decades, while diesel prices climbed at an even steeper percentage. Higher crude oil prices almost singlehandedly pushed U.S. TTM inflation from 2.4% in February to 4.2% in May.

Crude oil prices are now plunging, but Trumpflation continues to worsen

However, the per-barrel price of West Texas Intermediate (WTI) crude oil has reversed course in a big way over the last seven weeks. After WTI crude oil closed at nearly $109/barrel on May 18, it plunged to roughly $68/barrel as of July 6. This decline is being driven by speculation of a long-term peace deal between the U.S. and Iran, and a sustained reopening of the Strait of Hormuz.

On paper, this should be a straightforward resolution to the catalyst that drove inflation substantially higher between February and May -- but it's not that simple.

According to estimates from the Federal Reserve Bank of Cleveland's Inflation Nowcasting tool, Trumpflation is projected to worsen. Although the Cleveland Fed's proprietary inflation forecasting tool expects TTM inflation to soften from 4.2% to 3.49% between May and July, Core Personal Consumption Expenditures (PCE), which excludes volatile food and energy costs, is forecast to rise from 3.4% in May to 3.47% in July.

The reason we're witnessing a disparity between broad-based inflation and Core PCE is that we've entered the next phase of Trumpflation.

The Fed's preferred measure of inflation (Core PCE) moved up to 3.4% in May, the highest level since October 2023.

This was the 63rd consecutive reading above the Fed's 2% target level.

"We've missed for 5 years. And we're gonna fix that."-Kevin Warsh last week pic.twitter.com/Wtayfgt8sq

-- Charlie Bilello (@charliebilello) June 25, 2026

On the one hand, plummeting crude oil prices will provide some relief at the pump for consumers and businesses. Just keep in mind that global energy supply doesn't return to normal at the drop of a hat. Whereas fuel prices rise like a rocket when supply crises take shape, they typically fall like a feather once resolved. It'll take several months before the effects of sub-$70/barrel WTI crude oil are fully reflected in fuel prices.

The bigger issue is that the effects of Trumpflation have broadened well beyond the energy sector, as evidenced by the steady rise in Core PCE.

Although the Strait of Hormuz is a key transportation route for a fifth of the world's crude oil demand, it's not the only product shipped through this channel. Approximately one-third of the world's fertilizer passes through the Strait of Hormuz annually. With fewer nutrients currently available to commercial growers, produce is expected to become pricier.

The closure of the Strait of Hormuz has also disrupted shipping routes for a variety of sectors and industries. Rerouting supply chains and shipments is a cost that'll be passed onto businesses and, eventually, consumers.

Additionally, supply constraints for petroleum-based products have increased prices for select goods, such as synthetic plastics and polymers, as well as tires.

Fed Chair Kevin Warsh delivering remarks. Image source: Official White House Photo by Daniel Torok.

Trumpflation threatens to upend Wall Street's historic tech-driven rally

Although Core PCE isn't rising rapidly, the simple fact that estimates continue to climb as projections for the Consumer Price Index fall is all the evidence needed that the Federal Reserve may be forced into action.

The Summary of Economic Projections, released on June 17, showed that half of the 18 participating Federal Open Market Committee (FOMC) members believe one or more rate hikes will be needed before the end of 2026. Six FOMC members expect two or three rate hikes.

Furthermore, the new head of the Fed, Kevin Warsh, is a historic monetary hawk. During the financial crisis, he strongly favored higher interest rates, fearing that lowering lending rates would reignite inflation. In short, the table is set for the FOMC to raise interest rates.

Very hawkish dot plot.

Nine out of 18 officials have at least one hike this year (and six of those 9 have multiple hikes).

Only one person has a cut this year, and one participant (presumably Warsh) didn't submit an SEP

The statement gets a complete writethru from top to... pic.twitter.com/KRwatpTFOP

-- Nick Timiraos (@NickTimiraos) June 17, 2026

At the same time, Trumpflation is the catalyst that's fully capable of upending the artificial intelligence (AI)-driven bull market. Higher borrowing costs threaten to slow the AI infrastructure build-out, which has been essential to the eye-popping rallies observed in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.

Higher interest rates can also put valuations under a microscope. In early June, the stock market reached its second-priciest valuation in history (since January 1871), and came within a stone's throw of surpassing the priciness of the dot-com era.

Trumpflation is set to stick around for several quarters to come, and it may have dire consequences for Wall Street.