Kansas City Fed President Jeff Schmid recently reinforced the central bank’s cautious stance, stating that inflation remains 'too hot'.
This statement comes on the heels of fresh economic data that paints a concerning picture. The Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, rose 3.8% year-over-year in April, with the core measure (excluding food and energy) at 3.3%. Both figures are significantly above the Fed's 2% target, suggesting that the path to stable prices is proving longer and more difficult than anticipated.
So, what’s driving this resurgence in prices? The causal chain points clearly to a few key factors. First, the primary culprit is a recent energy shock. Geopolitical tensions between the U.S. and Iran caused Brent crude oil prices to surge, nearing $120 per barrel in late April. This directly translated into higher gasoline prices and transportation costs, which then rippled through the economy, contributing to over 40% of the monthly increase in the April Consumer Price Index (CPI).
Second, beyond the volatile energy sector, inflation is being kept stubbornly high by persistent price pressures in services. Strong wage growth, with average hourly earnings up 3.6% from a year ago, and steadily rising shelter costs are making services inflation 'sticky'. This means it is less responsive to interest rate hikes and poses a more structural challenge for policymakers.
This economic reality has shaped the Federal Reserve's internal debate. The April policy meeting revealed a notable 8-4 split vote to hold rates steady, with minutes indicating that some members were concerned about the easing bias. The hawkish dissent underscores a committee that is increasingly worried about persistent inflation, raising the bar for any future rate cuts.
In this context, Schmid’s 'too hot' comment is not an isolated warning but a reflection of a clear sequence of events: geopolitical risks fueled an energy price spike, which, combined with sticky services inflation, led to disappointing inflation data. This, in turn, has solidified the Fed's hawkish policy stance.
- Hawkish: A term used to describe a monetary policy stance that favors higher interest rates to control inflation, even at the risk of slowing economic growth.
- PCE (Personal Consumption Expenditures) Price Index: The Federal Reserve's preferred measure of inflation, which tracks the change in prices of goods and services purchased by consumers.
- FOMC (Federal Open Market Committee): The 12-member committee within the Federal Reserve System that sets the nation's monetary policy, including interest rates.