Inflation tied to the Iran war is no longer just an energy story. The Federal Reserve's preferred core gauge hit its highest level since October 2023 even as fuel costs cool, and the pressure is now showing up in fertilizer, plastics, and chipmaking.
Inflation stemming from President Trump's war with Iran has spread well past the gas pump. Core Personal Consumption Expenditures reached 3.4% in May, its highest level since October 2023, even as crude prices began to ease. Core PCE is one of the Federal Reserve's favorite inflation measures because it strips out volatile food and energy costs — which makes its climb harder to blame on the war's original flashpoint.
The energy shock that started it
Iran shut down the Strait of Hormuz to most commercial vessels shortly after Trump green-lit military action, halting approximately 20 million barrels of petroleum liquids, representing a fifth of global demand. Crude oil prices surged more than 70% within weeks, and gas prices rose at their fastest pace in more than three decades. Trailing 12-month inflation jumped from 2.4% to a three-year high of 4.2% between February and May, more than double the Fed's 2% target.
New pressure points beyond the pump
Businesses are rerouting shipments, switching suppliers, and shifting from maritime transport to air, rail, or truck, and passing the added cost on to consumers. Around a third of the world's fertilizer also passes through the Strait of Hormuz, so shortages there can reduce crop yields and push up supermarket prices. Petroleum-based inputs such as synthetic polymers and plastics have also gotten pricier, and the war has disrupted helium production, a cooling and purging agent chipmakers depend on. Qatar supplies more than a third of the world's refined helium.
Why the Fed can't just wait it out
The Cleveland Fed's Inflation Nowcasting tool projects headline inflation easing to roughly 3.22% in August from 4.2% in May. But its Core PCE forecast points the other way, inching up to 3.36%. Unlike an energy price spike, the shifts in shipping, fertilizer, and industrial inputs tend to be longer-lasting, so this stickiness could force the Federal Open Market Committee to raise interest rates rather than wait for prices to fall on their own. Higher borrowing costs would land squarely on the debt-funded AI infrastructure buildout that has powered much of the market's recent rally.
Source: The Motley Fool
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