Stocks Plunge as Inflation Fears Return: Oil Surge, Fed Hike Odds and the Data That Could Decide Everything

Wall Street opened its shortened holiday week on a sour note on Tuesday after renewed fighting in the Middle East sent oil prices towards one hundred dollars per barrel and once again reignited concerns of inflation. Dow Jones fell 628 points, that is, 1.2 per cent to finish at 52,786. The S&P 500 lost 0.6 per cent to 7,673 and the Nasdaq Composite dropped by 0.3 per cent to 26,421.

The drop was triggered by a steep fall in Amgen's share price, which slid around ten percent after a competitor's heart disease drug failed in a clinical trial. This one stock drove down the blue-chip index and was the reason because healthcare was the worst-performing sector amongst the S&P 500. The only sectors to finish in the green were energy and utilities, while financials and consumer discretionary also performed poorly due to the impact of higher borrowing costs on the sentiment of investors.

Oil's March Toward One Hundred

Brent crude, the international benchmark, closed the regular session at ninety-seven dollars and ninety-two cents, an increase of around one percent having previously hit ninety-nine dollars and forty-six cents during the day. West Texas Intermediate was close to ninety-two dollars. This increase followed attacks by Iran-supported Houthi forces on Saudi energy facilities and cities, with the United States retaliating with Iranian oil tankers as a response to Tehran's actions against U.S. warships. The flow of traffic in the Strait of Hormuz decreased and Iran issued a threat of more extensive retaliation.

The risk premium is responsible for a large part of the increase. Brent has risen about thirty-five percent from its summer lows and approximately eleven percent in the past month alone. Diesel prices peaked at record levels last week and U.S. gasoline is currently averaging four dollars and fifteen cents per gallon. According to an estimate by Brown University, the war's fuel costs for American consumers is now over one hundred billion dollars, with the figure rising by roughly one million dollars every two minutes.

The Fed Repricing

Higher energy prices are passed directly on to consumers and the Federal Reserve is keeping a close eye on the situation. The probability that traders now put on a quarter-point increase in rates at the FOMC meeting on September sixteenth is about fifty-eight per cent, an increase from around fifty-two per cent a few days prior. The ten-year Treasury yield finished at 4.805 per cent, the highest it has been since October 2023. The two-year yield climbed to 4.40 per cent and the thirty-year yield was close to 5.25 per cent.

Chairman Kevin Warsh has urged the importance of reducing inflation, and the markets are considering the forthcoming data as the last word before the decision is made. The Producer Price Index will be published on Thursday and the Consumer Price Index on Friday. The headline CPI is expected to be around 3.4 percent year on year, with core inflation easing to about 2.4 percent. This will be the numbers that will decide whether the hawkish stance will stay in place or whether the Fed can decide to stay patient.

Sector and Global Moves

Nvidia and Microsoft were also amongst the most sluggish of the Magnificent Seven, losing over one percent each thus having a negative impact on the Nasdaq. The Russell 2000 declined by zero point five percent. Over the year the S&P 500 has still risen by twelve point one percent, the Dow by nine point eight percent and the Nasdaq by thirteen point seven percent, so the pull back is a correction within the overall rise rather than a sign of a trend reversal.

European and Asian stock markets fell in response to the same developments. The yen reached a seven-month peak due to the expectation that the Bank of Japan might increase its interest rates this month. It is commonly expected that the European Central Bank will raise rates to 2.5 per cent on Thursday. Both gold and Bitcoin declined since higher yields were having a negative effect on risk assets.

What Comes Next

This week investors are focusing on three points: the numbers to be released for the PPI and CPI, any additional military developments which might disrupt oil shipments in Hormuz, and the Fed's decision in September. Goldman Sachs has raised the forecast for December 2026 Brent to $85 and its outlook for 2027 to $80 based upon the assumption that shipping disruptions will continue into next year. However, analysts do not expect a full return to pre-war levels of throughput until as late as the end of 2027.

At the moment the market is assuming the Fed will take a hawkish stance, but it will be the data published this week that decides whether this assumption remains valid. Should inflation ease as expected, the chances of a rate hike could decrease. However, if oil continues to rise and prices accelerate once again, the September meeting might result in the first rate increase in months.