Inflation, oil, Iran, and the Fed are no longer separate stories—they are one compounding risk.
KEY TAKEAWAYS
May CPI came in at 4.2%, up sharply from 2.4% in January. The move is not just a bad number; it shows inflation is accelerating again.
Energy is a major driver, with gasoline and broader energy prices pushing headline inflation higher. But core CPI, shelter, and services suggest the problem is spreading beyond the gas pump.
U.S. strikes near the Strait of Hormuz added a major geopolitical shock to the same morning’s inflation data. The post frames the escalation and CPI as one connected market event.
The Fed faces a policy trap because it can address demand-driven inflation but not war-driven energy prices. Rate hikes do not solve military risk in the Persian Gulf.
The investor takeaway is to avoid headline trading and focus on cause-level clarity. Volatility is not the real danger; reacting without understanding the cause is.
MY HOT TAKES
The market is underestimating how connected inflation and the Iran conflict have become. Treating them separately misses the actual source of risk.
“It’s just energy” is becoming too easy and too incomplete. Core inflation, shelter, and services are moving in the wrong direction too.
The Fed is trapped between credibility and reality. It may need to sound tough on inflation even though part of this inflation is outside its control.
Oil volatility around Hormuz is not a one-day shock. Each escalation resets the timeline and keeps the inflation problem alive.
The right investor response is not panic selling. It is knowing exactly what is owned, why it is owned, and how it behaves in a war-driven inflation regime.
You can quote me: “Rate hikes can slow borrowing and spending, but they do nothing about Iranian drones in the Persian Gulf”
Prescription at the front desk. I’ve been on Wall Street long enough to remember when a bad inflation number was just a bad inflation number. You absorbed the data, adjusted your models, and moved on. Take two Aspirin and call me in the morning. This morning felt different. At 8:30 AM Wall Street Time, the BLS released May CPI, which came in at 4.2%, and long before the ink was dry, markets were also absorbing US strikes against Iranian targets near the Strait of Hormuz, triggered by an Army Apache helicopter downed off the coast of Oman. Two massive events, landing on the same morning. But here’s what I want you to understand before we dig in: these aren’t two separate stories. They’re the same story.
Let me start with the number, because that’s where Wall Street started this morning. May CPI came in at 4.2%, exactly what Economists had penciled in. Just five months ago, in January, that same gauge was sitting at 2.4%. Let’s ponder that arc for a second, shall we? 🤔 Inflation went from 2.4% to the consensus of 4.2% in less than half a year. That’s not a trend. That’s a trajectory. 📈⬆️
The street’s first instinct, as it always is, will be to reach for the easy explanation. “It’s an energy story.” And that’s not wrong, it’s just not…well, right enough. Energy prices were up roughly 18% year-over-year in April and gasoline was up nearly 28%. Those numbers have been dragging headline inflation higher every single month since February, and nobody should be shocked by that. What I feel like I need to share with you–and this is what makes me sit straight up in my chair–is what’s happening underneath the energy line. Core CPI, which strips out food and energy to reveal whether inflation is actually spreading through the broader economy, ticked up to 2.9%. It’s up from 2.8% in April. A tenth of a point doesn’t sound like much until you realize it’s moving in the wrong direction while everyone was hoping it would be cooling. My friends, you might have missed this, but Shelter costs are back on the move. Services inflation hasn’t broken. The “it’s just gas prices” story is starting to look a lot like wishful thinking.
Now layer in what happened overnight, and this is where the morning gets genuinely complicated. Overnight Monday, a US Army AH-64 Apache helicopter went down off the coast of Oman while on patrol near the Strait of Hormuz. President Trump went on Truth Social and blamed Iran. The US military’s Central Command was considerably more careful, saying the cause remained under investigation. That gap between what the Commander-in-Chief said publicly and what the military was willing to confirm isn’t a footnote. It is the story. Because by 5 PM yesterday, CENTCOM had launched retaliatory strikes against Iranian targets near the Strait of Hormuz, describing them as “a proportional response to unjustified Iranian aggression.” Iranian state media reported explosions on an Iranian island in the Strait. And just like that, US and Iranian forces were trading blows, again, in the most consequential stretch of water on the planet.
The Strait of Hormuz–as I am sure you are well aware by now–is where some 20% of the world’s oil supply moves on any given day. When I’ve been talking about what I call geo-petro-politics–the intersection of military conflict and energy markets–this is exactly the kind of event I’ve been warning about. It’s not theoretical anymore. WTI crude jumped on the news before pulling back to around $88 a barrel, choppy, nervous, trying to price something that doesn’t have clean edges. Markets hate ambiguity. And right now, between a CPI print and an Apache helicopter, there is plenty of it to go around.
Am I surprised by this development? My faithful followers know well that I have been urging not to trade the headlines. Something I repeated to one of my fave journalists at Bloomberg yesterday afternoon. I also suggested keeping Dramamine at arm’s length because this volatility is likely to continue to keep you wide awake without needing any help from [FILL IN YOUR FAVORITE OVERPRICED CAFE HERE ☕🌀]
Here’s a little bit of insight I want to leave you with this morning, because I think it’s the one that you might miss today, if you are just deathscrolling over headlines. Most will refer to the CPI on one page and the Strait of Hormuz escalation on another page, as if they’re two unrelated events that happened to land on the same wacky Wednesday morning. They are not two stories. They are the same story. The reason inflation is running at 4.2% right now is substantially because energy prices have been on fire for months. The reason energy prices have been on fire is the Iran war that started on February 28th. The war is the inflation. The inflation is the war. They are a single compounding problem that has been building for over three months, and every time there’s a new escalation near the Strait–every time an Apache goes down, every time the US military responds,the clock on that compounding gets reset.
Which brings me to the Federal Reserve, and specifically to Kevin Warsh, who has the extraordinary misfortune of hosting his very first FOMC meeting as Fed Chair in exactly one week from now. Imagine yourself walking into that room with me for a second. ⚠️ Don’t stop at the table full of donuts and institutional coffee (unless the donuts come from Baked and Wired in Georgetown 😉😋)! The CPI says inflation is accelerating. This morning’s 4.2% print is the highest since May of 2023. Futures markets have already priced out every rate cut for 2026, and some traders are starting to whisper about hikes. The standard playbook in that situation is quite clear: tighten. But tightening into a war-driven energy shock is a very different animal than tightening into demand-driven inflation. Another scary fact that I often remind you of is that you cannot cool the Strait of Hormuz with a Fed Funds rate increase! Please read that again…please. 👀 Rate hikes work by slowing down borrowing and spending. They do absolutely nothing about Iranian drones in the Persian Gulf. Warsh knows this. The market knows this. But the Fed’s credibility demands it respond to inflation, even inflation it didn’t cause and cannot fix. That is the trap.
So what do you do with all of this? Here’s how I think about it for the investors I talk to every day–most of which have lived through enough market cycles to know that panic is never a strategy. First, understand what the Fed can and cannot control. The part of this inflation that lives in core services and shelter? The Fed has tools for that. The part that lives in gasoline and jet fuel because there are US military strikes happening near the world’s most important oil chokepoint? It does not. Those are two different inflation problems wearing the same CPI costume, and the market is going to spend the next several weeks trying to untangle them.
Second, please resist the urge to treat this as two separate risks to be “priced in” and moved past. The Iran conflict has been active since late February. This is not a one-day shock–it is the ongoing condition of the global energy market. Hence my prescription for Dramamine. Every escalation near the Strait resets the timeline for resolution. The choppy $88-ish WTI you saw this morning is not evidence that markets have absorbed the risk. It’s evidence that markets are exhausted from trying to price something that keeps changing.
My friends, in moments like these, you need to get very clear on what you actually own and why. Don’t run from volatility. Do run toward clarity. What I walked you through this morning is the cause-level picture, not the symptom-level headline. A bad CPI number and a helicopter shootdown are the symptoms. The cause is a war that has been reshaping global energy flows for over three months and shows no sign of ending, despite the everchanging and conflicting headlines. When you are clear about the cause, you can make clear decisions. When you only see the symptoms, you react. Please don’t be reactive–and consult a Physician before taking any Dramamine (I am not that kind of Dr. 😉)
YESTERDAY’S MARKETS
Stocks closed mixed on Tuesday as Iran tensions flared alongside renewed concerns about Wednesday's inflation data: the S&P 500 fell 0.26%, the Nasdaq dropped 0.97%, and the Dow eked out a gain of 0.17% to close at 50,872, with the Nasdaq paring intraday losses as deep as 3.5% after Trump signaled retaliatory strikes against Iran. The 10-year Treasury yield held near 4.57%, hovering at a two-week high as markets priced in an increasing probability of a Fed rate hike by year-end. WTI crude settled at $91.30 a barrel, pulling back from Monday's session high near $95 as Iran and Israel signaled a pause in hostilities. Chip stocks weighed heavily on the tape, with the iShares Semiconductor ETF shedding 1% after Monday's attempted 6% rebound failed to hold.
NEXT UP
Consumer Price Index / CPI (May) came in at 4.2% above April’s print of 3.8%
Important earnings today: Chewy, Core & Main, and Oracle.