US Inflation Slows, But Supply Shocks Remain

U.S. President Donald Trump's tariffs and the war in the Middle East have caused a supply shock leading to high inflation, which cannot be resolved by monetary or fiscal policy.

The average price of regular gasoline in the United States has exceeded $4 per gallon since early July, up from around $1 per gallon in May 2020. The prices are tied to logistics and transport costs, affecting inflation immediately in response to geopolitical risk.

As a result, energy prices are excluded when calculating core inflation. Despite recent readings of the consumer price index (CPI) and producer price index (PPI) coming in below Wall Street expectations for two straight months, the current inflation is not caused by ordinary demand swings.

The problem is that monetary and fiscal policy cannot directly resolve aggregate-supply problems such as a surge in oil prices. A complacent response could reprise the worst stagflation of the 1970s - recession alongside rising prices.