Kai Ryssdal

Core matters because food and energy prices are volatile and really not a good way to predict where overall prices are going to go.

Drought in Iowa, for instance, smaller soybean crop, higher prices.

The Fed is going to look through that.

Same, same for energy prices now going up because of a war.

That has resulted in what they're going to call a supply shock.

This is language that economists and people in my profession talk about all the time.

But I think.

If I went home and talked about it with my family, they would look at me like I had three eyes.

Just so we can avoid anybody looking at us like we have three eyes?

A supply shock is exactly what it sounds like.

The supply, in this case of oil, moving through the economy is suddenly a lot less than we are used to.

And an interest rate increase can't really do much to help that.

But, because there is always a but, there is a scenario where the Fed would raise rates in response to everything that's going on right now.

They are watching long-term inflation expectations.

If this energy shock leads people thinking prices are going to be higher for longer... That can lead to a cycle where prices keep rising faster.

inflation expectations, we talk about this on the program all the time, can be a self-fulfilling prophecy.

So the Fed's challenge is to keep inflation expectations in check, even though people are still feeling all the other supply shocks of the past few years.

COVID, the Russian invasion of Ukraine, tariffs, and now war.

To be clear, inflation expectations aren't showing that yet.

If you look at measures of long-term inflation expectations, they're hovering in the neighborhood of 2%.