Kimberly Adams

And the Fed, when they actually talk about inflation and what they target, they use a separate measure called the PCE deflator.

And right now they're measuring the same thing, the CPI and the PCE deflator.

So they do tend to track together over time.

But right now there is a pretty unique gap between the two in inflation.

So I would just flag that as something to keep an eye on.

Right now, if you look at what the CPI implies for the PCE deflator, it looks like the inflation as measured by the PCE is running a little bit stronger than what the CPI is actually suggesting at this time.

And so the Fed is probably on alert.

Right.

This report is showing us and we don't even have the March data yet that disinflationary progress is stalling out.

And now we're anticipating an energy price shock.

And that's just going to make any of the disinflationary pressures that we were hoping for.

all that much harder.

Now, when you think about how the Fed responds to supply side shocks in general, just over the course of time, they try to look through commodity price shocks in particular because they tend to be idiosyncratic, as we know.

And we saw the Fed actually have that impulse back when we were reopening from the pandemic.

They're trying to look through some of that energy price shock initially, but then we ended up reacting to inflation ultimately.

I think they're going to be a little bit more sensitive because of what we saw in the wake of Russia's invasion of Ukraine.

Inflation was really strong at that time.

I think they're going to be more sensitive to an energy price shock today, having learned from that experience.

I think all of these data point towards staying more restrictive, i.e.

maybe holding rates at their current level for longer than they anticipated before the shock because of some of that uncertainty related to energy.