As Adam pointed out, the inflation story was “overwhelmingly a gasoline story,” with energy accounting for more than 60% of the monthly increase in CPI.
That characterization may help explain why the market’s initial reaction has been relatively muted
However, the bigger issue for policymakers is what comes next. We’re now well into June, the conflict in the Middle East remains unresolved, and recent developments suggest the situation may be worsening rather than improving. If energy prices remain elevated or move even higher, today’s “gasoline story” could become a broader inflation story in the months ahead.
That raises the question of whether the Fed can afford to simply look through the latest rise in prices as a temporary shock. The Fed continues to emphasize its 2% inflation target, but markets will be paying close attention to next week’s FOMC meeting for clues about how Chair Warsh and other policymakers are interpreting the recent data. Are they still willing to view energy-driven inflation as transitory, or are they becoming more concerned that higher fuel costs could eventually spill over into core inflation and inflation expectations?