The escalating geopolitical conflicts involving Iran and other countries are directly driving up global fuel costs. Markets generally anticipate that this impact will be transmitted to domestic prices in the United States, with consumers, bond traders, and economists all expecting a significant rise in US prices over the next year.

In fact, even before the recent surge in energy prices and the nomination of the new Federal Reserve Chair with a dovish stance, the market had already begun to doubt the Fed's credibility in achieving its 2% inflation target. Potential oil supply shocks will further delay the time it takes to reach the inflation target, making the goal of "completing the task of controlling inflation" even more unattainable.

Multiple shocks combined have led to public skepticism about long-term goals.

Over the past five years, US inflation has been plagued by multiple external shocks: the pandemic, the Russia-Ukraine conflict, tariff policies, and the current geopolitical tensions related to Iran, with various events triggering price fluctuations one after another.

Each shock, viewed individually, was initially defined as a short-term phenomenon. However, as they accumulate, the American public has begun to question whether the 2% long-term inflation target is an achievable policy endpoint or an unattainable illusion.

Ethan Harris, former global chief economist at Bank of America Securities, likened the ongoing oil shock to "the last straw that broke the camel's back." He bluntly stated that after five years of high inflation, the United States is facing a new round of price increases. Even if this round of price increases only lasts for a few months, it will be enough to solidify the market's perception that high inflation will continue for a long time.

Divergent opinions within the Federal Reserve challenge policy confidence.

In recent months, Federal Reserve officials have faced direct criticism from the market regarding their commitment to maintaining their inflation target.

Cleveland Fed President Loretta Mester acknowledged that market participants have begun discussing whether the Fed will allow inflation to slightly exceed 3%, and explicitly emphasized that "bringing inflation back to 2% is a core priority for maintaining credibility."

When asked about the feasibility of inflation returning to the target by 2027 at an event in January, New York Fed President John Williams gave a firm answer that it was "fully feasible." This divergence in internal statements has added further uncertainty to the market's judgment on the policy direction.

The selection of a new leader is crucial, and pressure on people's livelihoods remains unabated.

Trump's nominee for Federal Reserve Chair is expected to succeed Jerome Powell in mid-May. Whether he can demonstrate policy independence and avoid interference from Trump will be key to restoring market confidence.

Trump insists that inflation has been tamed and will make low-interest-rate stimulus a key criterion for selecting his successor. Although the Federal Reserve's core inflation rate has remained slightly below 3% since the end of last year, a significant drop from the post-pandemic peak of over 7%, it has not eased the pressure on people's livelihoods—inflation remains a primary concern for many small business owners, and is one of the most important issues for voters in an election year.

Amidst the price shocks caused by geopolitical conflicts, gasoline prices in the United States have risen by more than 30%, and diesel prices by nearly 40%, leading to growing public suspicion that high inflation has become the new normal.

Supply shocks present a dilemma; inflation expectations remain stable but fragile.

Powell has stated that both the pandemic and the current energy supply shock are one-off events, and he does not believe that there will be more supply shocks globally. However, he also admitted that "the number of supply shocks experienced in the past five years far exceeds the total number of previous years."

For the Federal Reserve, which uses demand regulation as its core tool, sudden supply shocks often present policy dilemmas. Only by firmly anchoring long-term inflation expectations can it prevent a single price increase from evolving into a chain reaction.

Data suggests that the Federal Reserve has temporarily stabilized the situation: core long-term inflation indicators in the bond market have not spiraled out of control, and the breakeven inflation rate for 5- to 10-year U.S. Treasury bonds has not deviated significantly from the 2025 average in recent weeks; a University of Michigan survey shows that people's short-term price expectations have risen, but long-term expectations have fallen slightly.

The implicit erosion of public trust casts doubt on the "temporary inflation" argument.

When Powell mentioned the impact of the Iranian conflict at a Harvard University event, he emphasized that medium- to long-term inflation expectations "remain stable and anchored." However, former Bank of America economist Harris raised questions: bond market indicators and economists' forecasts are often highly consistent with the Fed's statements, implying a certain degree of blind trust. Meanwhile, household survey data, which truly affects the economy, shows rising inflation expectations, meaning that the Fed's credibility has been implicitly eroded.

Research by the New York Fed also confirms that public confidence in the Fed's ability to combat inflation is key to buffering the impact—one of the core reasons why tariff increases over the past year have not triggered a broad-based price hike is that stable expectations have suppressed wage increases.

Geopolitical conflicts introduce new uncertainties, highlighting persistent risks.

As inflation continues to exceed the policy target and market confidence weakens, Federal Reserve research suggests that current inflation expectations are more fragile than in the past, prompting a series of warnings from officials.

Kansas City Fed President Michelle Bowman said inflation is likely to stabilize around 3%, adding that "we should not assume that inflation driven by high oil prices is a short-term phenomenon." Philadelphia Fed President Susan Collins pointed out that people have been paying close attention to prices for five or six years, and their sensitivity to price changes has increased significantly. Fuel and fertilizer price increases will be transmitted to expectations more quickly and will be more persistent.

The recent Israeli strikes against Iran have brought the risk scenario to a head. An economist at BNP Paribas bluntly stated: "Can the Federal Reserve still instill the idea that inflation is temporary? Is the risk of such a statement too high to bear?"

If inflation expectations continue to spiral out of control, even if the Federal Reserve wants to implement loose monetary policy and cater to the demand for low interest rates to stimulate the economy, it will be forced by inflation to pause interest rate cuts or even restart interest rate hikes, putting monetary policy in a complete dilemma.

The rich can hedge against inflation through real estate and investments, while the poor can only watch their purchasing power shrink, ultimately widening the gap between the rich and the poor.

The decline in the actual purchasing power of ordinary people, squeezed out by soaring prices, leads to a vicious cycle of declining total social consumption, reduced corporate profits, business failures, decreased income for the working class, and shrinking social wealth.

The credibility of the US dollar and the Federal Reserve will continue to be damaged, which will further trigger capital outflows and increased volatility in financial markets, ultimately plunging the US economy into a longer period of adjustment.