Inflation Just Did Something It Hasn't Done Since 2023, and It Could Trigger a Big Move in Interest Rates (and the Stock Market)

The Consumer Price Index measure of inflation increased at an annualized rate of 4.2% in May, more than twice the Federal Reserve's 2% target.

Inflation hasn't been this high since 2023, and the Fed was aggressively hiking interest rates to bring it down back then.

The S&P 500 stock market index might be especially vulnerable to an increase in interest rates right now because of its high valuation.

Inflation is a crucial economic indicator, and understanding it can help investors make more-informed decisions. It's primarily measured by the Consumer Price Index (CPI), which tracks the change in price of a basket of goods and services on a year-over-year basis.

The Federal Reserve will adjust the federal funds rate (the overnight interest rate) when the CPI deviates too far from its annualized target of 2%. The Bureau of Labor Statistics (BLS) just released its inflation report for May, and the CPI surged to an annualized rate of 4.2%. The last time it was above 4% was April 2023, and the Fed was aggressively increasing interest rates.

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As a result, Wall Street is now forecasting at least one interest rate hike by the end of this year, and here's why the move could derail the momentum in the S&P 500 stock market index.

After defeating the inflation surge from 2022 that saw the CPI explode to 8%, the Fed has cut interest rates six times since September 2024. But the ongoing conflict between the U.S. and Iran has driven a surge in oil prices, with a barrel of West Texas Intermediate crude currently trading for $90, which is 56% higher than where it started the year.