Despite a laundry list of headwinds, the Dow Jones Industrial Average (^DJI -1.21%), S&P 500 (^GSPC -0.45%), and Nasdaq Composite (^IXIC -0.01%) have rallied to several record highs in 2026.
However, well-above-average inflation might be the straw that breaks the stock market’s back. Trumpflation (inflation that’s specifically driven by President Donald Trump’s policies) has boosted prices above the Federal Reserve’s comfort zone, with the effects of the Iran war doing most of the heavy lifting.
President Trump’s views on inflation overlook some very important details. Image source: Official White House Photo by Patrick B. Ruddy.
According to President Trump, crude oil prices and, therefore, fuel prices should drop “precipitously” and “quickly” once the U.S. has won the Iran war. Unfortunately, there are two critical problems with the president’s thesis, and they play an important role in the inflation outlook.
Trump overestimates a return to normal in the energy sector
The most front-and-center impact of the Iran war has been the impact on fuel prices.
Shortly after Donald Trump green-lit military action against Iran on Feb. 28, the latter closed the Strait of Hormuz to virtually all maritime traffic, effectively halting the daily flow of 20 million barrels of petroleum liquids. Removing approximately one-fifth of the world’s crude oil supply sent fuel prices soaring at the fastest pace in three decades.
BREAKING: President Trump says oil prices will drop and gas prices will fall to $2 per gallon once the US “wins the war with Iran.” pic.twitter.com/YOsgPO8VSy
— The Kobeissi Letter (@KobeissiLetter) September 7, 2026
When U.S. and Iran peace talks began heating up in June, crude oil prices plunged from their Iran war high. In other words, there’s a precedent for oil prices declining rapidly if peace brings about a reopening of the Strait of Hormuz.
However, President Trump appears to be vastly overestimating the return to normal in the energy sector. Hypothetically, even if the Iran war were to end today, it would take several months for energy supply chains to ramp up.
Furthermore, fuel prices are known to rise like a rocket during energy supply shocks and fall like a feather once those shocks are resolved. Even if crude oil prices fall “precipitously,” fuel prices are likely to remain elevated for several quarters.
Image source: Getty Images.
Iran war inflation is about more than the energy sector
The other, considerably more problematic issue is that President Trump continues to misinterpret the effects of the Iran war as purely an energy concern.
While pump prices have directly impacted consumers’ pocketbooks, economic data suggest that Iran-war-driven inflation has reached the broader economy. Whereas headline inflation, which includes energy prices, has dipped from a three-year high of 4.2% in May to 3.4% in August, Core Personal Consumption Expenditures (PCE), which excludes volatile food and energy costs, has hardly budged.
The Fed’s preferred inflation gauge, Core PCE, came in at 3.3% for July.
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
— Charlie Bilello (@charliebilello) August 26, 2026
In addition to the closure of the Strait of Hormuz leading to higher fuel prices, it’s also forcing some businesses to reroute shipments and alter their supply chains. Petroleum-based products, such as plastics and synthetic polymers, are more expensive, too. These higher costs are being passed on to consumers, leading to sticky core inflation.
Although the price effects of energy supply shocks tend to be short-lived, entrenched, broad-based inflation, such as we’re witnessing now with Core PCE, is considerably more challenging to eliminate.
Regardless of when the Iran war ends, the inflationary damage has already been done. The million-dollar question is: How much is Wall Street going to care?