In case you haven't noticed, the stock market is on fire. Last week, investors witnessed the Dow Jones Industrial Average (^DJI 1.21%), S&P 500 (^GSPC 0.74%), and Nasdaq Composite (^IXIC 0.89%) all log several record-closing highs, fueled by excitement over the evolution of artificial intelligence.
But the sustainability of this historic rally is very much in question, with the most important data release of the month, if not the second quarter, scheduled for one week from today. On June 10, at 08:30 a.m. ET, the U.S. Bureau of Labor Statistics (BLS) will publish the May inflation report -- and it has the ability to pull the rug out from beneath Wall Street.
Fed Chair Kevin Warsh and the FOMC face a sizable challenge from rapidly rising inflation. Official White House Photo by Daniel Torok.
The most consequential inflation report is one week away
To preface this discussion, some level of inflation (rising prices) is perfectly normal and healthy. Since January 2012, the Federal Open Market Committee (FOMC) -- the 12-person body responsible for setting the nation's monetary policy -- has targeted long-term inflation of 2%.
The issue is that trailing 12-month (TTM) inflation for May is expected to exceed the FOMC's long-term target by more than double.
Between February and April, TTM inflation jumped from a BLS-reported 2.4% to 3.8%. According to the Cleveland Fed's proprietary Inflation Nowcasting tool, TTM inflation for May is projected to rise by 38 basis points to 4.18%.
Monthly #PCE inflation data will be released tomorrow. Our #inflation nowcasting model (updated daily!) predicts year-over-year PCE #inflation of 3.83% for April. Check it out: https://t.co/qXCmAZQfCn pic.twitter.com/TyxPh218aq
-- Cleveland Fed (@ClevelandFed) May 27, 2026
The primary culprit for this rapid increase is the Iran war. Iran's closure of the Strait of Hormuz has stymied the movement of 20 million barrels of petroleum liquids per day. We've watched gas prices soar at the fastest pace in over 30 years.
But where the May inflation report could really hurt Wall Street is the potential spillover of higher prices into core inflation (i.e., excluding food and energy price changes). With the inflationary effects of energy price shocks often lagging for businesses by a few months, a notable uptick in Core Personal Consumption Expenditures can shake the stock market to its core (pun intended).
Image source: Getty Images.
President Trump may force the Fed's hand
What makes rapidly rising inflation so concerning is the historic priciness of equities. The only time the stock market has been pricier than it is now, based on the S&P 500's Shiller Price-to-Earnings Ratio, was in the months leading up to the bursting of the dot-com bubble.
Expensive stock markets demand perfection, which includes accommodative lending rates. When the year began, investors were expecting several rate cuts in 2026-2027. But with TTM inflation catapulting to a three-year high, the FOMC's rate-easing bias is likely to become history.
"If Trump wants someone easy on inflation, he got the wrong guy in Kevin Warsh."@AnnaEconomist pic.twitter.com/FGMfeSqHpU
-- Daily Chartbook (@dailychartbook) January 31, 2026
Making matters potentially worse for Wall Street, new Fed Chair Kevin Warsh has historically been a monetary hawk. In simple terms, his previous FOMC voting record shows he favors higher interest rates to suppress inflation.
President Donald Trump's actions in Iran and the subsequent inflationary effects that are now being observed in the U.S. economy may leave the FOMC with no choice but to act. Whether this action comes in the form of an eventual rate hike or simply a shift toward a neutral or hiking bias, it threatens to disturb the euphoria that's pushed the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite to all-time highs.
