Energy prices are going up. Here's why you shouldn't expect the Fed to do anything about it.

A gallon of gasoline currently costs $3.98 on average nationwide, according to AAA. That’s up one dollar compared to a month ago, when the war in Iran began.

Despite these price changes that consumers are feeling, the Federal Reserve isn’t likely to do much about it. Last week at the Fed’s press conference, Chair Jerome Powell said, “it is of course kind of standard learning that you look through energy shocks.”

“I assume he’s meaning that in response to higher prices, it is not going to be appropriate to raise interest rate targets,” said Cara McDaniel, a clinical professor of economics at Arizona State University.

Usually when prices go up, the Fed raises rates — see all the rate hikes of 2022 and 2023. But these are not usual inflation times. The price increases people are experiencing are in the energy category. And the Fed usually ignores food and energy prices and focuses on core inflation, which strips those categories out. That’s because food and energy prices are volatile, and therefore not predictive of future price increases. Think of a drought affecting one season of soybean crops and raising food prices.

There is suddenly a lot less oil supply moving through this economy than we’re used to because of the war. An interest rate hike can’t really fix that. So the Fed is likely to look through this energy shock.

But there is a scenario that could lead to the Fed raising rates right now: if inflation expectations go up.

“That can lead to a cycle where prices keep rising faster,” said Brian Blank of Mississippi State University.

The Fed will be closely watching inflation expectations and trying to keep them in check. It’s an especially tricky challenge right now given the past five years of elevated inflation and several other supply shocks — COVID, the Russian invasion of Ukraine, tariffs. And now war.

“After each one, people are starting to think, maybe this is just normal. This is how it is,” Blank said. “They’re definitely concerned that people are starting to assume that there’s another shock coming,” he said of the Fed.

But so far, inflation expectations aren’t showing that people expect another shock that will raise prices. According to the Federal Reserve Bank of Cleveland, ten-year inflation expectations sit at 2.3%, very close to the Fed’s 2% inflation target.

“I think that’s what I have learned over the last few years is that people see higher prices, but their long run still seems to be relatively stable,” Blank said. “I have interpreted that as the Federal Reserve has done a really good job of ensuring people that they take this very seriously.”