Investor concern over rising inflation expectations intensified following the release of a stronger-than-anticipated consumer price index (CPI) report on Tuesday, highlighting growing worries about the impact of surging energy prices on the economy.

Inflation expectations, as measured by the break-even rates derived from the yield difference between traditional U.S. Treasury securities and Treasury Inflation-Protected Securities (TIPS), recently reached levels not seen since October 2022. The five-year break-even rate climbed to approximately 2.7%, while the 10-year rate rose to 2.5%, marking its highest point since 2023. These shifts suggest investors anticipate an average annual inflation rate above the Federal Reserve’s target over the next several years.

The increase in inflation expectations reflects, in large part, the upward pressure from energy costs amid geopolitical tensions, particularly the ongoing U.S.-Iran conflict that has pushed oil prices higher. On Tuesday, crude oil prices advanced 4.2%, trading near $102 a barrel, and have surged roughly 78% so far this year. While oil price movements do not perfectly correlate with inflation measures, recent inflation bets imply concerns not only about current energy costs but also their potential persistence and broader effects on consumer prices.

The market reaction to Tuesday’s data was notable, with the Nasdaq Composite falling 0.7%, led by declines in major semiconductor firms. Intel’s shares dropped 6.8%, SanDisk fell 6.2%, and Micron lost 3.6%. These declines weighed on the S&P 500, which finished 0.2% lower. Meanwhile, the Dow Jones Industrial Average rebounded from early losses, closing up 0.1% or about 56 points. Yields on U.S. government debt rose, with the 10-year Treasury note ending at 4.462%, its highest closing yield since last July.

Market participants are increasingly concerned that elevated inflation expectations may compel the Federal Reserve to maintain or even raise interest rates, potentially tightening financial conditions. Analysts warn that this environment could challenge recent gains in stocks and other risk assets, which have so far largely weathered geopolitical shocks and price volatility.

Some strategists note the evolving dynamic in inflation outlooks could influence the Fed’s policy stance. Zach Griffiths, head of investment-grade and macro strategy at CreditSights, remarked that while policymakers had previously found some reassurance in stable market-based inflation expectations, the recent increase suggests a changing landscape that could weigh more heavily on equity markets over time.

Adding complexity to the situation is the anticipated leadership transition at the Federal Reserve, with President Trump’s nominee for Fed chair, Kevin Warsh, advancing through confirmation stages. Warsh has emphasized the importance of preserving the Fed’s independence and has expressed views at odds with Trump’s preference for rate cuts. His past involvement in providing bridging loans in the U.K. real estate market has drawn attention amid broader discussions on the Fed’s policy direction as inflation dynamics evolve.