The stock market has been the textbook definition of resilient in 2026. Despite a litany of headwinds threatening to upend equities, the mature stock-driven Dow Jones Industrial Average (^DJI +1.18%), benchmark S&P 500 (^GSPC +1.06%), and tech-powered Nasdaq Composite (^IXIC +1.40%) have rallied to several record highs.
But well-above-average inflation might be the one headwind that Wall Street is unable to shake off.
Image source: Getty Images.
The turning of the calendar to a new month means the Federal Reserve has new insights to offer on where inflation may head next. While the initial read on the central bank's September inflation forecast may seem positive, a deeper dive uncovers a glaring red flag for Wall Street.
Headline inflation is expected to ease in September
On weekdays, the Federal Reserve Bank of Cleveland's Inflation Nowcasting tool processes new economic data and adjusts its outlook for several inflation measures, including the Consumer Price Index (CPI), the aforementioned "headline inflation" measure.
BREAKING: July CPI inflation falls to 3.4%, in-line with expectations of 3.4%
-- The Kobeissi Letter (@KobeissiLetter) August 12, 2026
Core CPI inflation falls to 2.5%, also in-line with expectations of 2.5%.
Month-over-month CPI inflation rose +0.1%, up from -0.4% in June.
US stock market futures are rising on the news.
Since trailing 12-month (TTM) inflation reached a three-year high of 4.2% in May, headline inflation has been declining. This three-year high was primarily driven by a brief surge in fuel prices tied to the Donald Trump-led Iran war. As crude oil prices retraced from their Iran war high, gas and diesel prices at the pump slowly followed.
In June and July, TTM inflation dipped to 3.5% and 3.4%, respectively. According to the Cleveland Fed's latest update, the CPI is estimated to ease to 3.38% in August and 3.3% in September.
Lower headline inflation is undoubtedly the silver lining of the Federal Reserve's initial September inflation forecast -- but it doesn't tell the complete story.
Image source: Getty Images.
Core inflation forecasts are climbing, signaling that Trumpflation is entrenched in the economy
While headline inflation forecasts continue to fall, projections for Core Personal Consumption Expenditures (PCE), which excludes volatile food and energy costs, are climbing. Core PCE has historically been one of the favorite inflationary measures used by the Federal Open Market Committee (FOMC) when setting monetary policy.
After peaking at close to a three-year high of 3.5% in May, Core PCE retraced to 3.3% in June and remained at the same level in July. The Cleveland Fed's Inflation Nowcasting tool sees Core PCE reaccelerating to 3.4% in August and 3.49% in September.
The Fed's preferred inflation gauge, Core PCE, came in at 3.3% for July.
-- Charlie Bilello (@charliebilello) August 26, 2026
That marks 65 consecutive months above the Fed's 2% target.
In June, Kevin Warsh said:
"We've missed for 5 years. And we're gonna fix that."
So far: all talk, no action.
Video: https://t.co/9oZTwtA7vK pic.twitter.com/D5q3QLAEI1
Rising Core PCE amid a decline in headline inflation suggests that Trumpflation (inflation caused by President Trump's policies) is no longer just an energy issue. The inflationary effects of the Iran war, and more specifically the closure of the Strait of Hormuz, have reached the broader U.S. economy. Higher costs for petroleum-based goods (e.g., plastics), coupled with businesses being forced to reroute shipments and change suppliers, are examples of how added expenses are lifting consumer prices.
Core PCE forecasts also signal that Trumpflation is digging in its heels. Whereas energy supply shocks tend to be short-lived, the inflationary effects of the Iran war may last substantially longer than anyone expected.
This initial September inflation forecast suggests Fed Chair Kevin Warsh and the FOMC will need to act sooner rather than later. If the FOMC raises interest rates to deliver on Warsh's promise of price stability, it could end Wall Street's sensational four-year bull market. Increasing borrowing costs amid a partially debt-financed artificial intelligence data center build-out is a potential recipe for disaster for Wall Street's major stock indexes.
