Uh-Oh! 2 Critical Inflation Measures Are Heading the Wrong Way in November, and the Stock Market May Pay the Price.
Key Points
Although the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have been practically unstoppable for years, persistently elevated inflation can no longer be ignored.
The Cleveland Fed’s proprietary Inflation Nowcasting tool shows that two of the central bank’s closest-watched inflation measures are notably rising.
If President Trump’s policies trigger a more aggressive rate-hiking cycle, the AI infrastructure build-out and, therefore, Wall Street, would likely suffer.
For the majority of the last four years, Wall Street's bull market rally has been unstoppable. The artificial intelligence (AI) infrastructure build-out, better-than-expected corporate earnings, and record share buybacks have collectively propelled the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC) to several record highs.
But headwinds are mounting on Wall Street -- perhaps none greater than persistently elevated inflation. The latest Federal Reserve inflation forecast for November shows that consumer prices are heading in the wrong direction. If this prognostication proves accurate, the stock market may end up paying the price.
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Fed Chair Kevin Warsh and the central bank may be forced to get more aggressive with rate hikes. Image source: Official Federal Reserve Photo.
Two vital inflation measures suggest Trumpflation is worsening
There are several ways to measure inflation, but the Federal Reserve favors Personal Consumption Expenditures (PCE) above all else. Unlike the popular Consumer Price Index (CPI), the PCE accounts for the substitution effect (trading down to similar, cheaper goods), the cost of goods and services purchased on behalf of households, and its data is derived from more reliable sources than the CPI, such as business surveys and GDP supplier reports.
The latest update from the Federal Reserve Bank of Cleveland's Inflation Nowcasting tool, as of Nov. 6, shows that two of the most critical inflation measures, in the eyes of the Fed, are heading the wrong way.
After the PCE Price Index jumped from 3.4% in August to 3.6% in September, the Cleveland Fed's Inflation Nowcasting tool projects an increase to 3.77% in October and 3.82% in November. For context, Fed Chair Kevin Warsh has been adamant that the central bank will deliver on its promise to achieve PCE inflation of 2%.
BREAKING: US September PCE inflation, the Fed's preferred inflation metric, rises to 3.6%. Core PCE inflation also rose to 3.1%, up +0.3% month-over-month. This officially confirms that CPI, PPI, and PCE inflation are all rising again. A December rate hike is coming.
— The Kobeissi Letter (@KobeissiLetter) October 29, 2026
Additionally, Core PCE, which excludes volatile food and energy costs, is expected to rise from a reported 3.1% in September to an estimated 3.2% in October and 3.31% in November.
Both figures suggest that Trumpflation (inflation derived from President Donald Trump's policies) is worsening -- and that's bad news for Wall Street.
Image source: Getty Images.
Trumpflation may trigger a more aggressive Fed rate-hiking cycle
While prices typically rise modestly when the U.S. economy is expanding, two of President Trump's policies have elevated consumer prices: tariffs and the Iran war.
According to a recently published report by three New York Fed economists writing for Liberty Street Economics ("How Fast Do Tariffs Pass Through into Consumer Prices"), Trump's tariffs added 2.9 percentage points to goods price inflation by February 2026.
New from the New York Fed: "By February 2026, tariffs had contributed 2.9 pp to goods price inflation, and without them goods prices would have fallen slightly." About one quarter of every point in higher tariff rates shows up in consumer prices within one year. • A 10% across-the-board tariff yields a 2.6% rise in consumer goods prices after one year. • About two thirds of the increase comes from pricier imports, which get passed through quickly. • Another third comes from U.S. made goods, as producers face higher input costs and less import competition. This takes longer, about 6-12 months, to filter through.
— Nick Timiraos (@NickTimiraos) October 6, 2026
At the same time, the closure of the Strait of Hormuz due to the Iran war has led to the largest energy supply disruption in modern history. Gas and diesel prices have skyrocketed in its wake.
The projected rise in Core PCE also suggests that Iran-war-driven inflation has spilled beyond the energy sector and into the broader economy. Businesses being forced to alter their shipping routes, change suppliers, and/or pay more for petroleum-based products (e.g., plastics) are examples of added costs passed on to consumers.
The Cleveland Fed's inflation forecast points to the Fed getting more aggressive with interest rate hikes. That's a big problem for the stock market, which is dependent on debt to finance the AI infrastructure build-out. If AI data center costs meaningfully climb, the resulting slowdown in AI growth rates amid a historically pricey stock market could push the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite over the edge.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.