Inflation linked to tariffs and the conflict in Iran has reached a persistent stage in the US economy. Core inflation remained near 3.3% throughout the summer, despite a decline in headline prices. This divergence indicates that inflationary pressures have moved beyond energy costs and are affecting the broader market.
In July, tariffs were reinstated under Section 301 of the Trade Act, leading businesses to increase prices for consumers. Additionally, the closure of the Strait of Hormuz in late February disrupted the supply of approximately 20 million barrels of oil daily, representing one-fifth of global crude supply. This event also impacted one-third of the global fertilizer supply, raising agricultural costs.
Data from Barchart shows that diesel prices reached a record high of $6.50 per gallon in September. Meanwhile, the Federal Reserve's preferred inflation metric, Core PCE, has remained above the 2% target for 65 consecutive months. Macro strategist Jim Bianco suggests that markets are currently overlooking these structural issues by focusing primarily on oil.
On September 16, the FOMC, led by Chair Kevin Warsh, increased interest rates by 0.25 percentage points. This decision poses a challenge for the stock market, which is currently trading at its highest valuation since the dot-com bubble, as measured by the Shiller price-to-earnings ratio. Investors who anticipated rate cuts may need to adjust their expectations if inflation continues to influence Fed policy.
