Look at the two numbers that matter in this report and ask which one the Federal Reserve is fighting. Headline inflation is forecast at 3.6%, driven by energy. Core inflation, the measure that strips out food and energy and gives the best read on whether price growth is becoming embedded in the economy, is forecast at 2.5%. That is half a point above the Fed's target, not a runaway.
The Fed has just raised interest rates for the first time in three years and says more hikes are coming. That is a tool designed to cool demand, aimed at a problem that, by the evidence in this data, is mostly about the price of fuel. Higher rates will not put a single barrel of oil on the market. They will make it more expensive to buy a car, carry a credit card balance, finance a house, or expand a small business. If they work as intended, they will do it by making employers cautious about hiring. Someone has to absorb the cooling, and it is never the people with the most money.
That is the choice hiding inside the neutral language of "price stability." An energy shock is a transfer of wealth. Money moves out of the pockets of people who commute forty miles to a warehouse or a hospital shift and into the accounts of the companies that sell them the fuel. The household squeezed at the pump is then told that the remedy is to make credit dearer and jobs scarcer. The producer collecting the windfall is asked for nothing.
The serious objection deserves an answer. The New York Fed's survey shows households expect 3.9% inflation over the next year. Producer prices are forecast to rise 5.5% annually, and that pressure could work its way into the shelf price of everything. Central bankers remember the 1970s and fear expectations slipping loose. That is a legitimate worry. But households tell surveyors what they see on the gas station sign. That is not evidence of a wage-price spiral, and the core number, which is where a spiral would show up, is not showing one. Policymakers should wait for that evidence before choosing deliberate slack in the labor market as the cure. A pre-emptive strike against a threat that has not materialized is a gamble, and workers are the ones who put up the stake.
Nor is it true that the Fed is the only adult in the room. Congress and the White House have tools that actually address energy-driven inflation, and they are conspicuously unused. A windfall profits tax can claw back some of the gain from price spikes and fund direct relief for the households absorbing them. Strategic stockpiles can be managed for the benefit of consumers rather than traders. And the long-term answer is to build an economy whose daily costs are less hostage to volatile fossil fuel markets: more clean generation, better transit, more efficient homes. Every one of these would do more against an energy shock than a quarter-point hike.
The politics here are depressingly predictable. Washington prefers to leave the job to the central bank, because the central bank is insulated from voters and can do the unpopular work while elected officials point at it. That is not economic management. It is cowardice with a technocratic accent. Democrats, who will own whatever the labor market looks like by next fall, should stop deferring to the Fed's framing and start demanding policies that go after the cause of this inflation rather than its victims.
If core inflation starts to climb and wages chase prices, the argument changes, and honest people should say so. But the burden of proof belongs to those who want to slow the economy, not to those who want to protect the people who work in it. Right now, the data says the problem is energy. The response should be aimed there.
How it may affect me
If the Fed keeps raising rates, expect higher costs on credit cards, home equity lines, adjustable-rate mortgages and new auto loans. Paying down variable-rate debt now may help. Higher fuel prices also raise the cost of commuting and of goods delivered by truck, so watch your transportation and grocery budgets.
