Federal Reserve Bank of Richmond President Thomas Barkin cautioned on Thursday that inflation remains too high and the cumulative impact of repeated supply shocks risks loosening the public's inflation expectations. While acknowledging tentative signs of moderation, such as falling gasoline prices after a ceasefire in the Iran war, he noted that the personal consumption expenditures index, the Fed's preferred inflation metric, rose 4.1% in the year through May, the highest since April 2023. Barkin indicated that a return to the Fed's 2% target without further intervention, such as federal funds rate adjustments or labor market shifts, is unlikely.
Barkin specifically questioned the Fed's traditional approach of "looking through" supply shocks, suggesting that the frequency and intensity of recent disruptions—including geopolitical tensions, trade fragmentation, and rising debt—could make inflation stickier. This sentiment is echoed by other Fed officials like Chicago Fed President Austan Goolsbee, who warned that persistent supply shocks cannot be ignored. St. Louis Fed President Alberto Musalem also stated that further rate hikes are likely needed due to strong demand and commodity price shocks, and that acting sooner is preferable to waiting.
Despite some hopeful signs, such as decreased oil prices, Barkin remains concerned about other inflationary forces, including the build-out of artificial intelligence infrastructure and the behavior of businesses that incorporate current inflation into their pricing decisions. He noted that businesses are facing higher input costs but are also seeing consumer resistance, which limits their ability to pass on all costs. Strong consumer spending, which remained robust even with rising prices, also presents a headwind to achieving the 2% inflation target.
Barkin's remarks, along with those of Goolsbee, signal a growing concern within the Fed that inflation pressures are more persistent than previously anticipated, reinforcing a market shift towards a "higher-for-longer" interest rate outlook. While not explicitly endorsing another rate hike at this time, Barkin's comments highlight the ongoing challenge the Fed faces in balancing its dual mandate of stable prices and maximum employment, especially given the current economic climate.
