The financial press needed only minutes to take a hot CPI headline number and turn it into a Fed-panic story. CNN promptly won the ugly-poster-child award, telling viewers that consumer prices “spiked” and that the Fed is now more likely to raise rates next than lower them.
Reuters offered the buttoned-down version of the same mistake: inflation has hit its fastest pace in three years, rate cuts are being pushed further into the future, and some analysts now see a growing probability of hikes if energy prices stay elevated.
That is exactly backward. The May CPI report is not a story about an overheating domestic economy. It is not a story about runaway wages and a wage-price spiral. It is not a story about broad-based inflation spreading through the economy. It is a story about an oil and gasoline price spike caused by Iran’s rogue behavior.
Headline CPI rose because gasoline jumped. Core CPI came in better than expected. Core goods prices actually fell. Let’s do the numbers:
Headline CPI rose 0.5 percent in May, right in line with expectations. But core CPI — which strips out volatile food and energy — rose just 0.2 percent, below expectations. On a year-over-year basis, core inflation was 2.9 percent.
That is the number the Fed should be watching. And that number says the underlying inflation trend remains contained.
In sharp contrast, the headline number was driven overwhelmingly by energy. Energy prices rose 3.9 percent in May. Gasoline alone jumped 7 percent. Energy accounted for roughly 60 percent of the total monthly CPI increase. Strip away that oil shock and the inflation picture looks very different.
Memo to CNN: Core goods prices actually fell in May. New vehicle prices fell. Used cars and trucks remain lower than a year ago. Grocery prices barely moved. Beef and dairy prices declined. Prescription drug prices are down over the past year. Motor vehicle insurance, one of the nastiest Biden-era household inflation stories, finally delivered meaningful relief.
This is exactly what an oil shock looks like. It hits hard at the pump. It bleeds into headline CPI. It squeezes real wages in the short run. But unless it spills broadly into core prices and wages, the correct monetary-policy response is patience, not panic.
Repeat after me—and Alan Greenspan and Ben Bernanke: NEVER raise interest rates into the teeth of an oil-price shock.
Greenspan did not turn the 1990 Gulf War oil shock into an excuse to crush the economy. Bernanke did not treat the Iranian terror-driven 2006 energy and geopolitical shock as a reason to keep tightening indefinitely after the prior tightening cycle.
Greenspan and Bernanke understood what too many Wall Street commentators keep forgetting: a stagflationary oil-price shock already does much of the contractionary work of a rate hike. It taxes consumers at the pump, cuts real wages, drains purchasing power, and slows demand without any help from the Fed.
That is why raising rates into such a shock is not merely unnecessary; it is dangerous. It layers a monetary shock on top of an energy shock and can turn a temporary headline inflation spike into a significant recession.
The Fed’s job is to separate signal from noise. The signal in today’s CPI report is contained core inflation. The noise is gasoline. If the Fed confuses the two, it will do what bad central banks always do: fight the last headline instead of the real economy in front of it.
The policy conclusion should be obvious: hold firm.
The responsible journalism conclusion is equally clear: The networks and newspapers always eager for a viral headline should stop cheering for a rate hike every time a headline number looks ugly.
