The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Gabriel Rubin

WASHINGTON, June 10 (Reuters Breakingviews) - No central banker wants to replay 2022. But the U.S. economy looks increasingly like the post-pandemic reopening period, as a supply shock and tight labor market worked in tandem to push prices relentlessly, and quickly, higher. A 4.2% rise in the consumer index for the year through to May is the worst reading since 2023, while employers shook off early year doldrums and added hundreds of thousands of jobs in recent months. The combination should spook the Federal Reserve, as in-demand workers command higher wages to cope with galloping price gains, hinting at a future inflationary spiral.

New Fed Chair Kevin Warsh will have to grapple with abrupt changes in the recent data as he leads his first meeting of the Federal Open Market Committee next week in Washington. Cuts this year, as had been predicted prior to the start of the Iran war, are off the table. An unexpected gain of 172,000 jobs in May, along with upward revisions for prior months, raised the odds of a federal funds rate increase before the fourth quarter. Investors took note of Friday’s report, with the Nasdaq falling 4.2% on renewed rate-hike expectations.

Warsh has a grace period. No one expects the Fed to raise rates at its meeting next week. Bank of America analysts suggest the unemployment rate would have to fall to 4% from its current 4.3% to force the central bank’s hand. That’s not a large drop, considering the economy needs fewer than 90,000 new jobs a month to keep pace with tepid population growth.

The risk for the Fed in waiting is a rise in consumer inflation expectations and a demand for higher wages to compensate for lost earning power. Real wage growth has turned negative; falling 0.7% over the past year. On the other hand, acting too quickly could harm the labor market while doing little to calm headline inflation, since the high energy prices prompted by the shut Strait of Hormuz can’t be remedied by monetary policy tools.

The best Warsh can hope for is a swift resolution to the war, removing the root cause of price gains spreading throughout the economy. Short of that, expect rate hike chatter to build as the summer heats up.

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CONTEXT NEWS

The Consumer Price Index increased 4.2% in the 12 months through May, the ​largest gain since April 2023, the Labor Department's Bureau of Labor Statistics said on June 10. The ​CPI advanced 3.8% year-on-year in April. Prices increased 0.5% on a monthly basis after climbing ⁠0.6% in April.

The U.S. economy posted a third straight month of strong job gains in May with 173,000. Revisions to prior months added 93,000 more jobs in March and April than previously estimated and the unemployment rate held at 4.3% for a third consecutive month.