Roughly four weeks ago, the iconic Dow Jones Industrial Average (DJINDICES: ^DJI), broad-based S&P 500 (SNPINDEX: ^GSPC), and innovation-powered Nasdaq Composite (NASDAQINDEX: ^IXIC) all exploded to new highs. However, this rally doesn’t tell the complete story on Wall Street at the moment.
Aside from the artificial intelligence (AI) infrastructure build-out, no topic is garnering more attention than inflation. Although crude oil prices have come down in a big way over the last six weeks, the Federal Reserve’s latest June inflation update has an unpleasant surprise in store for Wall Street.
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Image source: Getty Images. A historic energy supply disruption has lifted U.S. inflation to a three-year high
While President Donald Trump’s tariffs are still providing modest upward pressure on select goods, the bulk of the inflationary pressure felt by consumers and businesses this year has come from the Trump-led Iran war.
Four months ago, Trump gave the U.S. military the green light to attack Iran. The latter responded by effectively shutting down the Strait of Hormuz to commercial vessels, thereby halting the daily flow of roughly 20 million barrels of petroleum liquids. This represents the largest energy supply disruption in modern history.
The subsequent reaction in energy markets was violent. West Texas Intermediate (WTI) crude oil surged from $67/barrel to more than $112/barrel in under six weeks. In turn, gas prices rose at the fastest pace in more than three decades.
In February, U.S. trailing 12-month (TTM) inflation clocked in at just 2.4%. By May, soaring energy prices pushed TTM inflation to 4.2%, the highest level since April 2023.
Fed Chair Kevin Warsh delivering remarks. Image source: Official Federal Reserve Photo. WTI crude is below $70, but Core PCE continues to climb
The silver lining for consumers is that crude oil prices have tumbled in recent weeks. The first close below $70/barrel for WTI crude since the start of the Iran war has Wall Street and investors excited about the prospect of lower inflation.
According to the June 26 update from the Federal Reserve Bank of Cleveland’s Inflation Nowcasting tool, the Consumer Price Index is expected to retrace slightly to 3.96% (over the TTM) in June. But this doesn’t mean inflation is yesterday’s news or that the Fed can take interest rate-hike talk off the table.
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