Even Before the Iran War, There Was a Growing Inflation Problem

10 hours ago

January PCE data shows inflation was already increasing before the Iran war, suggesting the Fed should pause or consider rate hikes.
PCE inflation rose to 2.91% in 2025, with recent three- and six-month figures at 3.47% and 3.19%, indicating acceleration.
Core goods inflation, partly due to tariffs, is a new contributor, but even excluding tariffs, inflation remains above 2024 levels.
Non-housing services inflation is contributing 2.04 percentage points over six months, signaling underlying inflationary pressures.
Market-based core inflation measures have accelerated, contradicting earlier expectations of cooling.
The labor market shows mixed signals, with unemployment flat but weakness in hiring and openings, especially for young graduates.
Fiscal stimulus from the OBBBA and potential war spending could further fuel inflation, complicating the Fed's position.
A Taylor Rule analysis suggests the Fed may need to raise rates, given current inflation trends.
The Fed faces challenges in managing inflation expectations amid ongoing supply shocks and fiscal impulses.

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