The Federal Reserve is signaling that it will look through the recent spike in inflation, viewing it as a temporary problem.
Recent economic data might seem alarming at first glance. The Consumer Price Index (CPI) for April 2026 rose to 3.8%, a figure well above the Fed's 2% target. The primary driver was a dramatic surge in energy prices, with gasoline up over 28% from the previous year. This directly impacts consumers not just at the pump, but also through higher food prices, as energy is a key cost in agriculture and transportation. This is the exact scenario that San Francisco Fed President Mary Daly recently described.
However, Daly is urging a patient approach, arguing that the cause of this inflation is critical. She identifies two main culprits, both of which are supply-side shocks rather than signs of runaway consumer demand. First is the geopolitical conflict in the Middle East, which has disrupted the Strait of Hormuz since March. This waterway is a vital artery for global oil shipments, and its closure has caused crude oil prices to spike over 50% year-over-year. This is a classic supply shock: the availability of a key commodity is suddenly reduced, pushing prices up.
The second factor is the tariff regime implemented in 2025. These tariffs increased the cost of imported goods, contributing to price pressures. But Daly believes these are one-off effects. As we move further away from their implementation date, their impact on year-over-year inflation figures will naturally fade—a phenomenon known as the 'base effect'. Her consistent messaging for months has been that these tariff effects will eventually 'roll off'.
By framing the inflation problem this way, Daly is making a case against a hawkish policy pivot. If inflation were driven by excessive demand (too much money chasing too few goods), the Fed's standard response would be to raise interest rates to cool the economy down. But since she sees the problem as stemming from temporary supply constraints, the more prudent course of action is to wait. Raising rates would do little to reopen a shipping lane or remove tariffs, but it could unnecessarily slow down the economy and harm the labor market. The Fed's stance, therefore, is one of watchful waiting, hoping these supply issues resolve themselves over the coming months.
- FOMC (Federal Open Market Committee): The committee within the Federal Reserve that is responsible for making key decisions about interest rates and the growth of the U.S. money supply.
- Supply-side shock: An unexpected event that suddenly changes the supply of a product or commodity, resulting in a sudden price change. These shocks can be negative (decreasing supply) or positive (increasing supply).
- Base effect: The distortion in a monthly inflation figure that results from the way it is calculated as a year-on-year comparison. A high or low inflation number in the corresponding month of the previous year can make the current figure appear unusually high or low.