While the Fed doesn’t target core inflation, when energy or food is influencing overall prices, core can illuminate trends. The core personal consumption expenditures rate was rising before the oil shock, from 3% in December to 3.4% in May, driven by tariffs, energy prices, and AI infrastructure demand.Waller says core inflation is a good guide to future inflation, and if the upward trend continues, pushing inflation back toward the 2% target gets difficult to do with the Fed’s current policy, he said. It still isn’t clear whether core inflation will continue on its upward trajectory or if it has reached a turning point.Another hot reading might force the Fed to consider tightening in the near term, Waller says. Even if the core number is softer in June, after the escalation in recent months, Waller would need to see several months of lower readings to feel that inflation is moving in the right direction.There is still a credible case for inflation to begin returning to the Fed’s 2% target without raising rates, Waller said. There are some crucial differences in the current economic conditions compared with 2021, including a labor market that isn’t nearly as tight. Current inflation expectations still seem well-anchored.