The Affordability Problem Is Far From Solved

In his State of the Union address on Feb. 24 — how long ago that seems — the president claimed that the problem of “affordability” was solved. He spoke too soon. Even before the strikes on Iran drove the price of oil sharply higher, concern about inflation was mounting. A prolonged conflict in the Middle East would be sure to make things worse.

Higher energy costs threaten higher prices combined with slower economic growth — the toxic phenomenon known as stagflation. It’s the Federal Reserve’s worst nightmare, because standard monetary tools can’t cope. Cut interest rates to stimulate the economy and you risk entrenching the rise in inflation; raise them to curb inflation and you risk a deeper slump. Recommended practice in such cases is for the central bank to “look through” the increase in inflation. In other words, grit your teeth, leave policy unchanged, let the (presumed) one-time rise in prices squeeze real incomes and wait for the economy to get past it.