In a recent address, Kansas City Federal Reserve President Jeff Schmid conveyed concerns regarding the economic implications of rising oil prices, prompted by escalating tensions in the Middle East related to the Iran crisis. Speaking in Oklahoma, Schmid remarked that the current increase in oil prices is not simply a short-term fluctuation but a significant factor contributing to ongoing inflationary pressures, which have persisted above the Federal Reserve’s target of 2% for the past five years.
Schmid pointed out that prior to the recent surge in energy costs, inflation, measured by the Fed’s preferred Personal Consumption Expenditures (PCE) index, was already hovering around 3%. He highlighted that while past oil price shocks might have been viewed as transient issues, the present circumstances demand a more cautious approach. “With inflation already running hot, now is not the time to assume that the inflation from higher oil prices will be transitory,” he stated, reiterating his concerns about complacency regarding inflation expectations.
His comments followed Fed Chair Jerome Powell’s acknowledgment on Monday that the Federal Reserve has traditionally overlooked oil price shocks in decision-making, yet the current rise in prices coincides with a prolonged period of elevated inflation. Schmid noted that oil prices have spiked by over 50% in just the past month, which is likely to fuel expectations of heightened inflation in the coming months.
Despite the negative historical impact of significant oil price increases on economic growth, Schmid expressed confidence that the current economy’s increased energy efficiency may mitigate such effects this time around. He mentioned that the economy might be better positioned to absorb the oil price shock, signalling a potentially less adverse impact on growth compared to previous decades.
Regarding the labour market, Schmid shared that he is not overly concerned about slower job growth, attributing this to the relatively stagnant growth of the working-age population. As a result, fewer jobs are needed to maintain a stable unemployment rate. Schmid emphasised that, amid various economic forces affecting inflation and employment, his primary focus remains on the inflation risks posed by the current economic environment, influenced by the conditions leading up to this oil price shock.
In sum, Schmid’s remarks underscore the complexities and concerns surrounding rising energy prices in the context of inflationary trends and economic growth, prompting a call for careful evaluation by policymakers in the face of these challenges.
