The Federal Reserve's Initial August Inflation Forecast Has Arrived, and It Contains a Glaring Red Flag That Can Come Back to Bite Wall Street

Though the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite recently hit new highs, inflationary worries are mounting on Wall Street.

The Federal Reserve Bank of Cleveland's Inflation Nowcasting tool projects a third straight month of easing for headline inflation in August.

However, the price stickiness of Core Personal Consumption Expenditures (PCE) suggests that Iran-war-driven inflation has become far more entrenched.

Despite a turbulent March, it's turned into another banner year for Wall Street. The Dow Jones Industrial Average (DJINDICES: ^DJI) and S&P 500 (SNPINDEX: ^GSPC) both climbed to record highs this week, while the technology-driven Nasdaq Composite (NASDAQINDEX: ^IXIC) blasted to an all-time high in early June.

But if there's one headwind that's fully capable of knocking this bull market off its pedestal, it's inflation. Trailing 12-month (TTM) inflation hit a three-year high of 4.2% in May before easing to 3.5% in June, and three of the 12 voting members of the Federal Open Market Committee (FOMC) dissented in favor of a quarter-point rate hike at the July 28-29 meeting. The FOMC is the body, including Fed Chair Kevin Warsh, responsible for setting the nation's monetary policy.

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Fed Chair Kevin Warsh and the FOMC are contending with a challenging inflationary climate. Image source: Official White House Photo by Daniel Torok.

While the initial look at the Federal Reserve's August inflation forecast offers a bit of promise, there's a glaring red flag that Wall Street has, thus far, ignored .