Excluding food and energy, core CPI rose 0.4% on the month and 2.8% annually, both above levels consistent with the Fed’s 2% target. Kashkari noted that inflation has now run above that target for more than five years, a duration that he said raises the stakes considerably.
His central concern was the risk of expectations becoming unanchored. If households and businesses begin to assume that inflation will stay elevated and adjust their wage and pricing behaviour accordingly, the task of bringing inflation down becomes significantly harder and the policy response required to achieve it significantly more forceful. “We’re much better off doing what we need to do to keep inflation expectations anchored,” he said, making clear that the cost of inaction compounds over time.
On the drivers of the current inflation episode, Kashkari traced a sequence of overlapping shocks: the Covid-19 pandemic, tariffs, the war in Ukraine, and now the conflict in Iran. He said some residual pressure from earlier in the cycle remains, but identified energy and fertilizer prices as the primary forces behind the current surge. Jefferson said risks to inflation are tilted to the upside while keeping June’s policy meeting explicitly open. Kashkari’s comments add weight to a picture of a Fed that is in no hurry to ease and is watching the Iran conflict’s commodity market consequences with close attention.
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Kashkari’s comments add another voice to the hawkish chorus emerging from the Fed this week, consistent with the tone set by Governor Cook and Vice Chair Jefferson. His explicit warning that persistently elevated inflation could force more aggressive action raises the tail risk of a larger move than markets are currently pricing
