Trumpflation Is Evolving, and There’s a New Twist That Threatens to Sink Stocks
For the better part of the last four years, the stock market has been unstoppable. The artificial intelligence (AI) infrastructure build-out has helped propel the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC) to several record highs this year.
But these gains may prove fleeting, courtesy of Trumpflation — inflation specifically driven by President Donald Trump’s policies — and a new twist identified by Federal Reserve policymakers that throws a serious monkey wrench into their rate-hiking cycle.
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President Trump’s policies are adversely impacting consumer prices. Image source: Official White House Photo by Daniel Torok.
Trumpflation is evolving — and that’s a big problem
Inflation isn’t inherently bad. Modest inflation is expected if the U.S. economy is growing and businesses possess some degree of pricing power over their goods and services. Over the long run, the Federal Reserve targets a 2% inflation rate.
However, two of President Trump’s policies lifted the annualized inflation rate to a three-year high of 4.2% in May. It’s this persistently elevated inflation that prompted the Federal Open Market Committee (FOMC) to raise interest rates by a quarter-point on Sept. 16.
The first culprit is Trump’s tariff and trade policy. According to a new report (“How Fast Do Tariffs Pass Through into Consumer Prices”) by three New York Federal Reserve economists writing for Liberty Street Economics, the president’s tariffs increased goods price inflation by 2.9 percentage points by February 2026.
The Trump-led Iran war is also adversely impacting consumer prices. The ongoing closure of the Strait of Hormuz has disrupted the daily flow of approximately 20 million barrels of crude oil, sending diesel prices to record highs.
But Trumpflation is also evolving — and that’s a big problem.
Core inflation data suggest that the Iran war is no longer just a story of energy supply disruption. Businesses are being forced to alter their modes of transportation, shift shipping routes, and change suppliers, resulting in higher expenses that are passed on to consumers. The more Trumpflation evolves and becomes entrenched in the U.S. economy, the more likely the FOMC will need to get aggressive with its rate-hiking cycle.
Image source: Getty Images.
A new inflation twist bodes poorly for the stock market
But it’s not just Trumpflation that the Fed and investors have to worry about. In June, FOMC policymakers identified a new source of inflation that’ll be incredibly difficult to tackle: the AI infrastructure build-out.
For the stock market, the evolution of artificial intelligence has been a godsend. The insatiable demand for graphics processing units (GPUs) and high-bandwidth memory (HBM), among other products, has afforded these businesses exceptional pricing power.
Unfortunately, otherworldly pricing power comes at a potentially steep cost. Between persistent GPU and HBM supply shortages and strong pricing power, higher costs for processing chips and memory have worked their way down to the consumer level. Several tech-driven devices, such as laptops and smartphones, now cost more because of the AI infrastructure build-out.
This inflation twist puts the Federal Reserve in a bind. If FOMC policymakers raise interest rates several times to deliver price stability, they risk upending the AI-driven bull market. The AI data center build-out wouldn’t be possible without debt-driven financing. If borrowing costs meaningfully rise in the coming quarters, it could spell the end of the AI boom and the second-priciest stock market in history.
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