Justin Wolfers on Inflation, Iran, and Why the Fed May Not Cut Rates

Added: 2026-06-01

[00:00:00]Professor of Economics at the University of Michigan. Justin, does this inflation report shed new light on what consumers were already feeling when it comes to prices?

[00:00:10]>> Right. What you can see right now is I actually had more here than this a few days ago. That hair line just keeps bouncing back.

[00:00:16]>> we're all pulling our hair out right now.

[00:00:19]>> Yeah, and look what we're seeing is you told the headline numbers, which are about what's happened over the last 12 months. What's more worrying is what's happened more recently, which is it looks like inflation is on the uptick.

[00:00:30]So, some of that is the delayed effect of tariffs. Some of that is the war in Iran, but even once you take all of that out, it feels like stuff is running a little bit hot right now, and I don't think I'm telling the folks anything they don't already know, which is the cost of living is rising at a at a pretty uncomfortable rate.

[00:00:48]>> This is the first inflation report with Kevin Warsh as the new Fed chair, and we know Trump's eager for the Federal Reserve to cut interest rates. What's the likelihood of that happening now?

[00:00:59]>> Yes, I first of all, let's not blame Kevin for this one. All of these price rises happened over the previous 12 months. But if what you want is uh rate cuts, here's the thing you don't do. You don't go and bomb a country in the Middle East, upsetting global energy markets, and pushing prices up across the board. Uh we've got fairly rapid rates of price rise right now. These are rates where even Trump's own adviser, Kevin Hassett, a few months ago had said it would be ridiculous to expect a rate cut anytime soon.

[00:01:27]And so, in some sense, what you could ask yourself, what is the Iran war already cost me? And the answer is you were expecting a couple of rate cuts this year, a bit of relief on the mortgage or on the car loan. That's gone, and the Fed is more likely to raise rates next than to lower them.

[00:01:43]>> Is that what needs to happen to see consumer prices cool? That interest rates go up?

[00:01:48]>> Right. That's not the only thing that could happen. In fact, relying on the Fed to offset these supply shocks is incredibly indirect. Look, here's the story. If prices are rising because of tariffs, the easiest thing to do is get rid of the tariffs. If prices are rising because the Strait of Hormuz is closed because of our war on Iran, the easiest thing would be actually start focusing on getting the strait reopened. So, what the Fed is doing is it's acting in a way and to clean up behind the White House.

[00:02:16]The White House has the more direct tools here. The White House could fix all of this. The White House though so far is showing no signs of doing so.

[00:02:22]>> Right. President Trump has put this economy through the wringer and I want to show a chart that shows the impact of his tariffs from Liberation Day to the start of this year and now we have core inflation at 3.3% for April. There's also the downturn in GDP growth. Justin, where's the economy headed if we stay on the trajectory the president set?

[00:02:44]>> Yeah, right now we're firmly in B- minus territory and that's in a country where there's so much grade inflation. We give everyone an A these days.

[00:02:51]Um the the GDP numbers are actually very concerning. Let me explain why. I just want to give a little bit of context.

[00:02:56]So, GDP growth this quarter was 1.6% which sounds kind of okay except remember the previous quarter the government was shut down. And so, what happened was we produced less last quarter. So, when we just bounced back to normal, that explains a lot of what's going on right now. So, in some sense this is an inflated number. If you look over the last 6 months as a whole, the economy has barely grown at a rate of 1%. Technically, it's 1.1%.

[00:03:23]That um look, my if I brought that report home report card home to my mom, she would give me a very very disappointed look.

[00:03:31]>> Yeah, I >> [laughter] >> I love how you always bring back to the family and and we can all relate. Thank you, Justin Wolfers. Good to see you.