Inflation Isn't Just a Trumpflation Problem Any Longer -- There's a New Culprit, and It Has Potentially Dire Implications for Wall Street

Since early June, we've watched the time-tested Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and technology-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) catapult to record highs. However, Wall Street's major stock indexes may not be telling the complete story.

Though there are always headwinds threatening to upend the stock market, arguably none has been more profound this year than inflation . Rapidly rising prices, driven by President Donald Trump's policies, are making life challenging for the new Fed Chair, Kevin Warsh, and the Federal Open Market Committee (FOMC) -- the 12-person body responsible for setting the nation's monetary policy.

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But this challenge just became more complex. There's a new culprit that's driving up U.S. inflation , and it has potentially dire implications for Wall Street.

Before diving in, it's worth noting that a modest level of inflation is normal and healthy for a growing economy. In an expanding economy, businesses should possess some degree of pricing power for their goods and services. Even the Federal Reserve has been targeting a long-term inflation rate of 2% since January 2012.

But in May, trailing 12-month (TTM) inflation more than doubled this long-term target, reaching a three-year high of 4.2%. Two concurrent price shocks, courtesy of President Trump's policies, have been behind this inflationary surge.

To begin with, Trump unveiled sweeping global tariffs and higher reciprocal tariffs on dozens of countries in April 2025. Despite the U.S. Supreme Court invalidating most of these tariffs in February 2026, the president reinstated sweeping global tariffs (under a different justification) shortly thereafter.

Adding duties to unfinished imported goods, such as raw metals, can increase domestic production costs for finished products. Eventually, these higher costs are passed on to consumers, leading to a bump in TTM inflation. If there's a silver lining with tariffs, it's that their impact on the prevailing inflation rate should wane after this year.

The second concurrent price shock can be traced to the Iran war. Trump's decision to attack Iran on Feb. 28 led the latter to shut down the Strait of Hormuz to most maritime traffic. The result has been the largest energy supply chain disruption in modern history. In a matter of weeks, crude oil prices soared, causing pain at the pump for consumers and lifting TTM inflation to 4.2% in May.

Unfortunately, Trumpflation has entered a new phase. Even though crude oil prices have tumbled from their Iran-war peak, we're witnessing evidence that the inflationary effects of this war are spilling over into non-energy sectors and industries. This suggests the inflationary impact of the Iran war will stick around considerably longer than initially expected.

Trump-driven inflation has been the talk of Wall Street for much of the last year -- but it's no longer the only culprit responsible for driving year-over-year price changes to a three-year high.

On July 8, the Federal Reserve published the minutes from the FOMC's June 16-17 meeting. Since Fed Chair Warsh removed forward-looking guidance from FOMC meeting statements, the Fed minutes now provide the closest thing we have to an in-depth read on what policymakers are thinking.

While the Fed meeting minutes contained several statements of interest, including the decisive claim to "deliver price stability," it's the FOMC's latest comprehensive review of inflation that should be turning heads and raising eyebrows. As stated in the minutes:

Both total and core inflation were higher than their levels a year earlier, a development that the staff attributed to a variety of factors, including the pass-through of past tariff increases, higher energy and input costs stemming from the conflict in the Middle East, and the surge in demand related to the AI [artificial intelligence] build-out. Core goods price inflation has risen relative to a year earlier, which the staff judged as largely reflecting the effects of tariffs and AI-related price pressures.

That's right! Wall Street's premier catalyst, the artificial intelligence (AI) revolution, is now being cited by policymakers as a leading driver of above-average inflation.

Although demand for AI infrastructure has been robust, there's been a clear supply shortage for certain components in AI-accelerated data centers. This dynamic is rewarding businesses at the forefront of the AI evolution, and setting the rest of the economy (and stock market) up for potential disaster.

For instance, demand for Nvidia 's graphics processing units (GPUs) is off the charts. In addition to Nvidia's GPUs having superior compute capabilities, chip fabricators can't make GPUs fast enough to satisfy the overwhelming demand from hyperscalers.