The Fed is fighting the wrong war on inflation

The Federal Reserve raised interest rates this week, pushing the federal funds rate to a range of 3.75 to 4 percent. That decision will not produce more oil, reopen disrupted shipping lanes or remove tariffs that are raising production costs. It can, however, weaken investment, hiring and wage growth.

Before imposing those costs, policymakers should ask whether they are fighting the inflation we actually have. The crucial question is not simply whether inflation is too high, but why prices are rising and whether higher interest rates can address the source of the problem.

Much of the recent increase reflects supply pressures. Conflicts disrupting global energy flows have pushed up oil and gasoline prices, raising costs throughout the economy. In August, gasoline prices rose 3.9 percent and accounted for more than one-third of the increase in the Consumer Price Index.

Those increases do not just remain at the pump, either. Energy is an input into nearly everything we produce and consume, so higher fuel costs eventually appear even in core inflation measures that do not include energy directly.

A price-level increase caused by a supply shock is not the same as a continuing inflationary process. If oil rises from $70 to $100 a barrel and then remains there, gasoline, production and transportation costs rise while the economy adjusts. Once that adjustment is complete, the oil increase alone does not keep generating inflation. Oil would have to continue rising, or the initial shock would have to set off repeated increases in wages and other prices.........

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