Waller warns rising core inflation may force policy tightening
Federal Reserve Governor Christopher Waller warned that the central bank may need to tighten monetary policy if incoming data shows core inflation remaining elevated. Speaking on July 13, Waller noted that 12-month core PCE inflation reached 3.4 percent in May.
Broad price pressures beyond energy
Federal Reserve Governor Christopher Waller highlighted that core personal consumption expenditures inflation climbed steadily from 3.0 percent in December 2025 to 3.4 percent in May.
Headline PCE inflation reached 4.1 percent over the same period.
While recent declines in crude oil prices are expected to reduce headline inflation, Waller stressed that core inflation remains elevated across broad categories.
Nearly 70 percent of core services categories posted three-month and 12-month annualized inflation above 3 percent.
Key drivers include input costs from import tariffs, lingering energy effects, and surging demand for artificial intelligence infrastructure, which has raised prices for semiconductors and computer servers.
Waller noted that intermediate goods prices in the producer price index also reflect ongoing upward pressure.
A balanced labor market and anchored expectations
Waller drew key distinctions between current conditions and the 2021-2022 inflation surge.
Today's labor market displays balance, with job growth averaging 111,000 per month over the past three months and average hourly earnings growing at 3.5 percent.
The job vacancies-to-unemployed ratio stands near one-to-one, compared to two-to-one in 2022, increasing the risk that rate increases could raise unemployment.
Furthermore, market-based inflation expectations remain anchored, with two-year and five-year Treasury Inflation-Protected Securities at 2.1 percent and 2.3 percent.
No room for monetary complacency
Waller rightly stresses that anchored inflation expectations cannot replace concrete monetary action when prices stay high.
Yet waiting for months of confirming data risks repeating the very delays the Federal Reserve experienced in 2021.
The FOMC must move promptly if June price figures show another upward surprise.