So here's the uncomfortable question that hung over Wall Street all week: Did the conflict with Iran just permanently change the game for inflation and interest rates in 2026?

By Friday, the markets had delivered their verdict, and it wasn't exactly comforting.

The Strait of Hormuz is still shut. Brent crude oil finished the week north of $110 a barrel. But the real story has moved from the strategic waterway to your local gas station. U.S. retail diesel prices crossed the $5 per gallon mark—that's a 35% spike from $3.69 just a month ago, and it's closing in on the painful records set back in 2022. Gasoline isn't far behind, pushing toward $4.

Consumers have definitely noticed the pinch. And, more importantly for markets, so have the people who trade money for a living.

Traders are now pricing in a scenario that seemed almost unthinkable just a few weeks ago: the possibility of the Federal Reserve raising interest rates. Think about that. This is the same Fed that President Donald Trump has spent his entire second term publicly pressuring to cut rates. Now, the central bank might be forced to do the exact opposite.

Oil Shock Triggers Inflation Warnings

The data is starting to show just how quickly perceptions are shifting. The University of Michigan's survey captured a dramatic change in inflation expectations in the nine days after U.S. military operations began. Expectations for how much gas prices will rise over the next year surged to 42.6%, up from just 10% before the crisis.

It's not just about gas, either. Broader inflation expectations are creeping up. Year-ahead expectations climbed from 3.3% to 3.5%, and long-run expectations nudged up from 3.1% to 3.3%. It's an early signal that this energy shock might be changing how Americans think about prices across the board.

The betting markets have moved sharply, too. Traders now see it as a coin-flip chance that the annual inflation rate for March will come in above 3.4%. For context, that figure was 2.4% in February. A one-percentage-point jump in annual inflation over a single month is a historically rare event, something that usually only happens around major energy crises.

The Federal Reserve took notice at its meeting this week. In its updated economic projections, policymakers raised their inflation forecasts. Chair Jerome Powell acknowledged that energy-driven price pressures represent a meaningful upside risk to the inflation outlook. The Fed held rates steady but pointedly declined to rule out future increases.

Markets got the message, loud and clear, and they didn't like it. By Friday, money markets were pricing in a better-than-even chance that the Fed raises rates by October. U.S. short-term Treasury yields spiked toward 4%, on pace for their biggest monthly jump since February 2023.

The result was a brutal week for anything sensitive to interest rates. Take gold, for example. It had a great run last year on expectations that rates would fall. This week, it tumbled 9.8% by midday Friday—its worst weekly performance since 1983. Silver and gold mining stocks fell sharply right along with it.

It was a sea of red for stocks, too. The S&P 500, Nasdaq 100, and Dow Jones all closed below their 200-day moving averages at the end of the week, marking the first time that's happened since March 2025. The S&P 500's 14-day Relative Strength Index (RSI) dropped below 30, crossing into what traders consider "oversold" territory for the first time since the tariff shock of April 2025. The selling pressure showed no sign of letting up.

Every major sector finished the week in the red, with one notable exception: the Energy Select Sector SPDR Fund (XLE), which remains the sole clear beneficiary of the ongoing crisis.

Chart of The Week: S&P 500 Closes Below 200-day Average, Hits 'Oversold' RSI

Image created using artificial intelligence via Midjourney.