Fed Brings a Demand Tool to a Supply Fight

Key arguments

• Rate hikes target demand, but much of current inflation is supply-driven and thus less responsive to rates.
• Acyclical inflation has trended higher since early 2024 and drove nearly two-thirds of July 2026 core PCE inflation.
• Health care services explain only a small and shrinking share of acyclical inflation, so other supply factors are at work.
• The Fed aims to keep supply shocks from broadening into generalized inflation, but risks sapping demand and hurting the job market.

Corresponding source evidence

1. This mismatch explains why the first two questions Federal Reserve Chair Kevin Warsh faced from reporters after the Fed voted in September to hike interest rates for the first time in three years were basically the same question: How will higher rates lower inflation that's driven largely by supply problems?
2. Additional data from the San Francisco Fed shows that the recent rebound in PCE core inflation has been driven primarily by acyclical inflation.
3. (Again, this doesn't include energy prices.) Meanwhile, though cyclical inflation has ticked higher in recent months, as of July it was lower than it was a year earlier.