Elevated tariffs and Middle East conflict drive persistent inflation, raising concerns for the Federal Reserve and equity markets

U.S. inflation has stayed above the Federal Reserve's 2% goal, with the 12-month rate falling to 3.4% in August after peaking at 4.2% in May. Analysts attribute the sustained price pressure to two of President Donald Trump's policies: a series of global tariffs and the conflict with Iran.

The administration introduced a set of tariffs in April 2025 under the International Emergency Economic Powers Act, which were later invalidated by the Supreme Court. A subsequent 10% global import duty expired in July, and new tariffs ranging from 10% to 12.5% were imposed on more than 80 countries in late July under Section 301 of the Trade Act. While intended to protect domestic jobs, the duties increase costs for imported raw materials and unfinished goods, which can be passed on to consumers.

In February 2026, the Iranian decision to close the Strait of Hormuz halted the flow of roughly 20 million barrels of petroleum liquids per day, sharply reducing global crude supply. The disruption pushed U.S. gasoline and diesel prices to multi-decade highs and raised the cost of petroleum-based products such as plastics, synthetic polymers and tires. The closure also affected fertilizer shipments, contributing to higher food prices.

Core Personal Consumption Expenditures, which excludes food and energy, showed little change—3.5% in May and 3.3% in June and July—indicating that inflationary pressures have become entrenched beyond the energy sector.

"The price stickiness of Core PCE confirms that Trump-driven inflation has entered its next phase," a market analyst noted.

Federal Reserve Chair Kevin Warsh and the Federal Open Market Committee face a prolonged period of rate hikes to bring inflation back to target, a process that could take many months. Continued tightening may also weigh on the technology sector, where artificial-intelligence-related stocks have driven a significant portion of recent market gains.

"If the FOMC delivers several additional rate hikes beyond the quarter-point increase on Sept. 16, it could slow the AI infrastructure build-out and force investors to rethink the valuations assigned to AI stocks," a financial commentator warned.