(The Center Square) – Oil prices jumped again in September, but core inflation has been relatively subdued. Hiring remains weak, and wage growth slowed further. So far, the data support my argument: higher energy costs are squeezing activity without clear evidence of a new, self-sustaining inflation cycle.
The Federal Reserve needs to give that adjustment time.
In March 2025, before the Liberation Day tariff announcement, headline PCE inflation was initially estimated at 2.3%. The policy rate was 4.25%–4.50%. Before the Iran conflict, February inflation was initially reported at 2.8%. By August, it was 3.4%. Energy prices were nearly 17% higher than a year earlier; inflation excluding energy was 2.9%.
I understand the argument for tightening. With headline inflation at 3.4%, a Taylor rule assuming a low neutral real interest rate and no economic slack can prescribe a policy rate around 4.6%. September’s hike began reversing last year’s easing.
But a rule cannot distinguish an oil shock still passing through prices from inflation becoming self-sustaining. That distinction requires judgment.
And the bond market has already tightened borrowing conditions considerably. By October 1, the two-year Treasury yield was 4.78% and the ten-year was 5.24%—up 140 and 127 basis points, respectively, from February 27, immediately before the conflict. Those increases raise financing costs across the economy.
Households and businesses are absorbing both shocks.
Businesses cannot necessarily pass every cost increase to customers. September’s Beige Book reported that greater customer price sensitivity was limiting pass-through. In the Chicago district, some service businesses struggling to raise prices were cutting hours or becoming more cautious about expansion.
The adjustment can therefore appear in smaller margins, weaker hiring and delayed price increases.
Recent inflation momentum supports patience. Core PCE prices increased at approximately a 2.1% annualized rate over the three months through August. The Fed targets headline inflation, but core remains useful for assessing underlying pressure. That pace is difficult to reconcile with broadly accelerating inflation.
September’s renewed oil increase complicates the adjustment. Brent’s November contract gained roughly 14% during the month. Gasoline responds quickly; airlines, trucking companies and manufacturers adjust as contracts reset and inventories turn over.
But indirect pass-through isn’t the same as a second-round effect.
An airline charging more because fuel costs more is transmitting the original shock. A second-round effect occurs when higher living costs change broader wage demands, expectations and price-setting, sustaining inflation after energy costs stabilize.
A higher price level can permanently reduce purchasing power without permanently increasing inflation. Once the adjustment finishes, expensive oil stops adding to price growth.
It acts like a heavy tax on activity. Families have less money for other purchases. Businesses face higher costs. More expensive credit compounds the squeeze.
The labor market offers little evidence of an emerging wage-price spiral. Unemployment remains relatively stable at 4.2%, yet annual hourly wage growth slowed to 3.0% in September, its lowest since May 2021. Real hourly earnings continue to fall.
Workers are losing purchasing power rather than winning raises that chase prices higher.
That is the case for patience.
This week, I’ll watch the September meeting minutes, due Wednesday, Oct. 7. What evidence convinced policymakers to hike, and what would justify another increase?
The Fed should remain alert to persistent inflation. But so far, the data show an economy absorbing higher costs, constrained pricing power and slower wage growth. That gives policymakers reason to wait.
