The Fed's concern isn't just the current high inflation rate, but the risk that prolonged high inflation changes public psychology. If businesses and consumers begin to expect continued price hikes, they may become less price-sensitive, creating a self-reinforcing 'snowball' effect that makes inflation much harder to control.

Inflation from a supply disruption, like an oil price spike, will eventually fade. It only becomes persistent and embedded in the economy if governments try to 'help' consumers pay for higher costs with stimulus checks, which increases the broad money supply.

While events like the pandemic, the Ukraine war, and the Iran conflict are individually unique, their rapid succession conditions the public to expect continuous price shocks. This transforms transitory inflation into a deep-rooted psychological problem for central banks, as people stop seeing these events as isolated.

Pessimism on inflation is warranted because common analysis misses key factors. Household inflation expectations are becoming unanchored, the overall economy is tight based on the output gap (not just unemployment), and the "new normal" is a state of recurring supply shocks, not a return to pre-shock stability.

While the direct impact of tariffs may be temporary, the elongated process risks making consumers and businesses comfortable with higher inflation. Combined with questions about the Federal Reserve's political independence, this could unmoor expectations and make inflation persistent.

History suggests that if inflation remains high for too long, it can alter public psychology. Businesses may become less hesitant to raise prices, and consumers may grow more accepting of them. This shift can create a self-perpetuating feedback loop, or 'snowball' effect, making inflation much harder for the central bank to control.

Consumer sentiment is low not just because of inflation but due to the psychological weight of a constant barrage of overlapping crises (a "polycrisis"). The volume of uncertainties—geopolitical, technological, economic—creates an incessant feeling of instability that weighs on consumers, even when their personal finances are stable.

While a single tariff hike is a one-time price shock, a policy of constantly changing tariffs can become a persistent inflationary force. The unpredictability de-anchors inflation expectations, as businesses and consumers begin to anticipate a continuous series of price jumps, leading them to adjust wages and prices upwards in a self-reinforcing cycle.

The narrative of "well-anchored" inflation expectations is being tested by the oil shock. The 5-year breakeven inflation rate, a key market indicator, has risen 20 basis points from 2.4% to 2.6%. This indicates investors are beginning to price in higher inflation for longer, not simply looking through the shock.