Prices for everything from gas to food to housing are rocketing higher, but the Fed's best weapon for fighting inflation might not be enough

• The Fed is taking the fight to inflation, but its best weapon could be hampered by the pandemic.
• Interest rate hikes typically cool inflation, but they can't heal the supply-chain mess that's sent prices soaring.

The Federal Reserve is about to take the fight to inflation but its main tools might not work in the pandemic economy.

Inflation over the past year has been higher and longer-lasting than most economists and policymakers predicted. Prices for common goods and services in the US soared 7.5% in the year through January, reflecting the fastest inflation since 1982 and a larger-than-expected acceleration from December's pace.

The report showed the country's inflation problem growing even worse and placed fresh pressure on the Fed to cool the economy. Fed Chair Jerome Powell said in January that policymakers are "of a mind" to start raising interest rates in March.

Rate hikes represent the Fed's best tool for slowing inflation, as higher rates tend to slow the economy, weaken spending, and encourage saving. When inflation trended at similar highs in the early 1980s, it took historically high rates to bring price growth back to earth.

Fighting inflation in 2022 probably won't be so simple. Higher rates can place a drag on demand, but a large part of the current inflation problem exists on the supply side. Port logjams and materials bottlenecks slammed the global economy through the fall as Delta variant crippled the shipping industry. The fallout left businesses struggling to shore up inventory while spending held strong. That gap between supply and demand intensified already red-hot inflation through the end of 2021.

Higher rates would likely slow spending, but they won't help businesses stock their shelves any faster. With supply still strained, even moderate spending can keep inflation at uncomfortable highs.

Signs point to demand starting to ease in December, but supply strains are running rampant. Semiconductor shortages have crimped production of vehicles, appliances, and electronics. The labor shortage is still holding strong as well, leaving many businesses unable to run at full capacity.

Raising interest rates would do little, if anything at all, to improve the supply problem. The Fed can only wait for the private sector to clean up the mess.

"There are other forces at work this year which should also help bring down inflation, including improvement on the supply side, which will ultimately come," Powell said in a January 26 press conference, adding "the timing and pace of that are uncertain."

Some of the biggest contributors to recent inflation are also little affected by higher rates. Food and energy prices – which are historically more volatile than other categories – both rose 0.9% in January, according to the Consumer Price Index. Within the latter category, fuel oil surged 9.5%, more than any other item in the January CPI report. And while gasoline prices fell 0.8%, the average price-per-gallon in the US rose to $3.44 in the first week of February. That's the highest since September 2014.

And like the supply-chain mess, tighter Fed policy can only do so much to cool food and energy prices. Inflation in both categories is far more resilient, since Americans spend on food, gas, and heating regardless of how high interest rates are. If food and energy prices keep soaring, the Fed could have a sticker inflation problem on its hands.

To be sure, most experts still see inflation dying down by the end of the year. Wall Street economists at Jefferies and JPMorgan see the US already past the worst of the supply-chain mess, and forecast the situation will improve steadily through 2022. The Omicron variant seems to have had a less dramatic effect on global industry than previous waves of the virus, meaning a key driver of pandemic inflation could soon ease, JPMorgan economists Joseph Lupton and Bruce Kasman said.

"The pressures on both output and prices are now fading. The sharp bounce-back in global industry last quarter supports our key near-term call that these supply constraints are now easing," they added.

The Fed's upcoming rate hikes are sure to put fresh pressure on inflation. But the degree of their effects is unknown, and there's reason to believe they won't be as powerful as usual.