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.

The primary inflation risk isn't a single event, but the compounding effect of multiple transient shocks (e.g., wars, tariffs). When these occur too frequently, businesses and consumers begin to perceive them as a permanent feature of the economy, leading to un-anchored inflation expectations even if the underlying causes are temporary.

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.

The economic impact of tariffs is not an immediate, one-time price adjustment. Instead, Boston Fed President Collins characterizes it as a "long one-off" process where the full effect can take months or even a year to filter through the economy. This prolonged adjustment period extends uncertainty and complicates inflation forecasting.

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.

Even as recent inflation surged, market expectations for inflation five years out remained stable at the Fed's 2% target. This demonstrates the power of the Fed's credibility. If the market loses faith, it can trigger a self-fulfilling wage-price spiral, making it much more painful for the central bank to rein in inflation.

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.