Kansas City Federal Reserve president Jeff Schmid said Tuesday night that inflation is too high and bringing it down will require higher interest rates.
“Given the strength of demand and investment, I do not see the current stance of monetary policy as restrictive,” Schmid said in a speech in Omaha, Neb. “As such, I believe that bringing inflation down to the Fed’s 2% objective will require tighter policy.”
Schmid, who won’t be a voting member of the Federal Open Market Committee until 2028, said while the most recent inflation data for June showed an encouraging deceleration, it would be premature to put too much weight on a single data point over recent trends.
The Personal Consumption Expenditures index clocked in at 3.3% in June on a “core” basis, which excludes volatile food and energy <a href="https://bitcomme.com/bookkeeping-prices-for-small-business-what-to-expect-in-2025/” title=”Bookkeeping Prices for Small Business: What to Expect in 2025″>prices. That’s down a tenth of a percentage point from 3.4% in May. Month over month, core PCE increased 0.1%, down from 0.3% in May. On a headline basis, PCE rose 3.7%, down from 4.1% in May.
He noted that volatile oil prices both pushed inflation up in prior months and contributed to the June decline.
“With the price of oil once again rising, it is uncertain how persistent any relief on energy will be,” Schmid said.
But Schmid stressed that higher inflation isn’t solely about energy. He noted that over the previous 12 months, inflation excluding energy was 3.2%, about half a percentage point higher than where it stood in June of last year.
He also cautioned against chalking up high inflation to supply shocks alone. The economy has undergone a series of supply shocks — first with the pandemic, then an oil price surge after Russia invaded Ukraine, then tariffs, and now another increase in oil prices with the Mideast.
Schmid argued that inflation is the result of the balance of supply and demand. Unless demand is strong, he said, there probably won’t be a run-up in prices. Strong demand is what creates the necessary backdrop for a supply disruption to lead to large price increases.
“A supply shock has a far different effect on inflation when demand is strong than when demand is weak,” he said.
Schmid pointed to recent work by Kansas City Fed staff suggesting that, although energy shocks have historically had only a temporary effect on inflation and inflation expectations, this is because the Fed has responded to such price pressures.
Schmid also made the point that the best measure of inflation is the Personal Consumption Expenditures index because it best reflects purchasing power.
