When US inflation peaked in June of 2022, fueled by rising prices for food, shelter, vehicles and other items as well as energy, Federal Reserve officials sternly assured the public that they were on top of the situation and would raise interest rates sharply to cool the economy.

They will have the opposite task after Friday’s release of consumer price index data showing the fastest rise in monthly headline inflation since the breakout summer of nearly four years ago, as they explain to inflation-weary folks why this round of price hikes is different, driven by energy costs associated with the Iran war that don’t require particularly high spending if current spending is needed. Washington and Tehran holdings and ease in oil prices.

It could be a sensitive sales exercise after more than five years in which annual price increases have exceeded the 2% target the Fed has pledged to maintain, and consumers digest the worst one-month jump in gasoline and diesel fuel prices, with the average gallon of gas rising from about $3 in February to about $4.15 in surveys. “The high (CPI) number is not a surprise to anyone,” San Francisco Fed President Mary Daly told Reuters a day before the release of the latest CPI data. If the truce holds and oil prices fall, inflation may moderate and the Fed may eventually reduce borrowing costs, she said; If oil prices and inflation are sticky, the Fed can stay on hold and wait. There is little chance that inflation will rise and the Fed will have to chase it with higher rates, Daley said.

Investors now expect the central bank to keep its policy rate on hold until 2027.

“We had work to do before the oil price shock hit; with the oil price shock, the work takes longer,” Daly said. “Nobody’s really sure how long it’s going to last. … We can stand still until we know we’re getting the job done.”

It’s different from the one the Fed hit in 2022 because current inflation is different. Beyond the dramatic 0.9% rise in monthly headline inflation in March, which would have been over 11% on an annualized basis, underlying “core” inflation was actually an expected 0.2% in the month and 2.6% year-on-year.

Core inflation excludes energy and food prices, which are closely linked to volatile commodity markets and are not thought to reflect the broader supply and demand conditions that determine inflation trends.

But food and energy costs are major parts of daily household spending, and prices — from a gallon of gas to a pound of beef — register deeply with consumers when they rise. They influence survey responses that Fed officials look to gauge whether the public trusts the central bank’s ability to control inflation, and they could influence political attitudes — a sensitive issue for President Donald Trump and his fellow Republicans ahead of the midterm elections in November and his promises to make life more affordable.

Shifts in Inflation Expectations

For the Fed, the risk is that five years of above-target inflation have led people to expect the worst, and an energy shock could prove enough to reset public psychology in a way that makes controlling inflation difficult. Data from the University of Michigan’s regular consumer survey showed on Friday that inflation estimates over the next year rose sharply to 4.8% in April, from 3.8% in March, but more sharply, estimates for inflation over the next five years also rose to 3.4% from 3.2%. The Fed has good reason to believe this uptick in inflation will be “temporary,” a term initially used as inflation spiked during the Covid-19 pandemic, but dropped as painful price pressures persist.

Now he needs to convince everyone else, at a time when his favorite measure of underlying inflation appears to be stuck at one percent above target.

“They can’t lower policy rates in this situation. If they do, they lose credibility,” said James Bullard, former president of the St. Louis Federal Reserve, now dean of the Mitch Daniels School of Business at Purdue University. “This is touch and go. If they stay where they are and inflation starts to come down again, it will look great. If it doesn’t, they may have to step up and show they are more serious.”

(Reporting by Howard Schneider; Editing by Paul Simao)