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NEW YORK (CNN/Money) -
If you had any doubts about the Federal Reserve continuing to raise interest rates in the weeks and months ahead, those doubts should have been erased by the release of the minutes from the Fed's last meeting on September 20.
The Fed made it clear it's much more worried about high energy prices causing a pick-up in inflation than it is about those same high fuel prices hurting consumers and causing a slowdown in the economy.
Hurricanes hurt now but will help later. Rate hikes, full speed ahead.
What is not clear is just why the Fed is so worried about an oil-induced acceleration in inflation. After all, it acknowledges that increases in two important inflation measures -- the core rate (which takes out food and energy prices) for both the Consumer Price Index or CPI, the Personal Consumption "deflator" -- are now "modest" after "considerable increases" earlier in the year. It also notes that some major measures of labor costs also remain very well behaved.
Fed officials seem most worried about the possibility that high and rising energy prices will "warp" our sense of economic reality by making us expect higher inflation.
As consumers, we will be more willing to pay a higher price for airline tickets because we know that high jet fuel prices are hammering the airlines. And then as businesses, we will be more emboldened to ask for higher prices on the goods and services we sell, because we know that our customers are in this energy-price fatigue state of mind.
If the Fed doesn't keep raising rates, it fears, this kind of psychology will become entrenched and prices could spiral higher and higher, the kind of dynamic that existed back in the 70s and early 80s when oil spiked and inflation soared.
Now, as for one of the many seemingly contradictory aspects of the Fed's thinking, the minutes note that the pass-through of high energy prices in the early 80s was quite limited and that suggested the passthrough of the current spike up in prices to core inflation "could stay relatively low."
The minutes even say that overall inflation could drop back if those dangerous (my word but that's the sense of it) inflation expectations remain "contained."
What gets very little play in these minutes, and thus seems to be a view distinctly in the minority at the Fed, is that there's a strong inflation "container" in the economy now -- and that is inflation itself.
After all, if the price of one important item like gas (now) and heating oil (soon) moves higher, that boosts inflation. But it also cuts down the amount you can spend on other stuff. And as people spend less on other stuff, the businesses that make those goods and services will have a tough time raising their prices.
Maybe they will even have to offer some discounts. Consumer discount shopping has become something of a national sport in this country.
Far from causing people to help drive a big upward spiral in inflation, this is the dynamic that should help cut it off at the knees.
Now, the Fed obviously sees an economy with so much forward momentum, so much hiring, so many budding shortages of goods and workers that it thinks it can't take a chance -- it must keep hiking rates. And it seems to worry that if it doesn't it will repeat the mistakes central bankers made in the 70's and it will allow inflation to get out of control.
But it's one thing to cut rates to help the economy ward off the damaging impact of high energy prices as central bankers did back them. It's quite another to raise rates at a time when high energy prices are also taking a toll.
Unfortunately we know little more and certainly not enough about the reasons for Fed governor Mark Olson's dissent from the latest rate hike than we did three weeks ago. The minutes say he wanted to wait to get more information on how the severe shock of hurricane Katrina would hit the U.S. economy.
In the end it doesn't seem to matter much. The majority has spoken loud and clear: "the upside risks to inflation appear to have increased." Even with the latest rate hike, "further rate increases would probably be required."
And unless the economy suddenly shows signs of stumbling badly, it looks like forecasts for rate hikes well into 2006 will prove to be correct.
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Inflation is Wall Street's top worry. Click here for the full story.
Click here for more commentary from Kathleen Hays.
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