The latest inflation report for April came in hotter than many expected, but a key Federal Reserve official is urging us to look beyond the startling headline number. Chicago Fed President Austan Goolsbee highlighted that the real concern isn't just the temporary spike in energy prices, but the stubborn, underlying inflation in services.
The numbers themselves tell a two-part story. The overall Consumer Price Index (CPI) rose by 0.6% in April, with energy prices contributing to over 40% of that increase. This was largely expected, given the recent surge in oil prices due to geopolitical tensions. However, what caught Goolsbee’s attention was the data on services. Inflation for services (excluding energy) rose by 0.5%, and shelter costs jumped by 0.6%. These categories are considered 'sticky' because they don't change quickly and are more reflective of domestic economic pressures, like wages.
This is why Goolsbee called services inflation the 'worst part' of the report. While an energy price shock can be temporary, sticky services inflation suggests that price pressures are more embedded in the economy. The Federal Reserve's primary goal is to bring inflation back down to its 2% target. When services inflation remains high, it makes that job much harder and raises concerns that the economy might be overheating.
The context for this report was already tense. First, the Fed has been dealing with the direct impact of the U.S.-Iran conflict on oil prices, which fed into the high inflation readings for both March and April. Second, the Fed's own policy committee (FOMC) had just held its April meeting, where several members showed resistance to the idea of cutting rates soon, citing these very inflation risks. Third, other data, like wage growth running at 3.6% and the Fed's preferred inflation gauge (PCE) remaining above 3%, already pointed to persistent underlying price pressures.
In essence, Goolsbee's comments shifted the narrative. The conversation is no longer just about a temporary oil shock but about a more fundamental inflation problem in the U.S. economy. This means the bar for the Fed to start cutting interest rates is now significantly higher. They will need to see clear and consistent evidence that services inflation is cooling before they can feel confident about easing policy.
- CPI (Consumer Price Index): A measure that examines the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
- FOMC (Federal Open Market Committee): The branch of the Federal Reserve that determines the direction of monetary policy, including setting the federal funds rate.
- Sticky Inflation: Inflation in prices for goods and services that change slowly and infrequently, such as rent or services wages. It is often seen as a better indicator of long-term inflation trends.