MW The 2 types of inflation the Fed can't control - and how Congress must protect your wallet
By Sameera Fazili & Joel Dodge
As permanent supply shocks drive up Americans' grocery and gasoline prices, lawmakers need to take a stand
The Iran war is disrupting the global supply chain and spiking inflation, saddling consumers and businesses with higher costs.
Supply-chain crises generate two types of inflation: "ripple-out" and "market power." But the Federal Reserve can't fix broken shipping lanes or corporate greed.
If it wasn't clear before the Iran war closed the Strait of Hormuz, it is undeniable now: The world has entered an era of supply shocks. Iran marks at least the third global supply-chain disruption over the past six years, including the COVID-19 pandemic and Russia's invasion of Ukraine. Whether caused by geopolitical conflict, health contagions or extreme weather, supply-chain crises will likely be a permanent fixture of the economy until global supply chains build in greater resilience.
Such crises inflict domestic economic harms with dramatic ramifications for consumers, companies and governments. To protect domestic economic security in this new era, U.S. policymakers must develop supply-chain shock absorbers.
No two supply-chain shocks are identical, but they tend to have several predictable consequences. First, they cause short-term shortages, which in turn lead to widespread and sometimes opportunistic price increases. Second, they cause particular strains to small businesses - enabling large companies to further expand their power in an industry.
Inflation infection
Supply-chain crises generate two different types of inflation. One can be thought of as "ripple-out" inflation, where a shock to an economically ubiquitous input - like energy - reverberates throughout other goods and sectors that depend upon it.
For instance, the recent spike in food prices is a direct result of rising energy prices; a recent estimate projects that the effects of the Strait of Hormuz closure will cause headline inflation in the U.S. Consumer Price Index to double over the coming months. This chain reaction has even given the Federal Reserve pause about the path of inflation.
The second type is market-power inflation, where sellers use the crisis as cover to flex their dominant economic position to extract extra price hikes from consumers. Even after the immediate crisis has passed, sellers with market power tend to maintain these new, higher prices.
The downstream impacts are not just felt by consumers. Within industries, as a supply-chain crisis unfolds, fear and self-protection instincts kick in, with hoarding and company-level stockpiling resulting in confusing demand signals that make it hard for upstream producers to respond. As competition over scarce resources sets in, big companies use their buying power and relational importance to muscle out other buyers.
For instance, during semiconductor shortages, chip producers act as de facto rationing authorities by choosing which customers to prioritize - and in general, they have favored companies that can commit to long-term, high-volume purchases and afford to pay the highest prices. This exacerbates anti-competitive dynamics in industries with large or dominant players, and places acute pressure on small companies across the economy.
Washington's haphazard response
The U.S. needs new tools and creative applications of existing ones to address the predictable needs of consumers and businesses: stable prices and fair market access.
Unfortunately, right now the federal government's response to supply-chain crises remains uneven and haphazard. It currently lacks the policy tools to adequately address such crises. The U.S. needs new tools and creative applications of existing ones to address the predictable needs of consumers and businesses: stable prices and fair market access.
First on that list should be permanent supply-chain management capabilities in federal agencies so that the government stands ready to respond to these crises. As part of the legislation that became the CHIPS and Science Act, Congress considered creating a new Office of Supply-Chain Resilience and Crisis Response. The new office would have been responsible for working with industries, making investments and conducting strategic planning to affirmatively secure critical supply chains. The Biden administration demonstrated what successful analysis and action-oriented coordination could achieve, with its agency-led supply-chain studies and interagency Supply Chain Resilience Council. It may now be time for Congress to review this progress and revisit the creation of a more organized crisis-response system.
Policy can create better shock absorbers so consumers and small businesses are not left paying the price. To stave off potential shortages of critical goods, the federal government can build up stockpiles and reshore critical manufacturing, including through public factories. To restrain the domino effect of ripple-out inflation, Congress can restore the government's authority to impose targeted and temporary price stabilization on critical impacted goods during abnormal market conditions. To crack down on companies opportunistically raising prices, Congress can regulate price gouging by companies trying to take advantage of an emergency. A dedicated crisis-response team should also be empowered to gather real-time data, convene the industry players that run these supply chains, and coordinate actions among companies.
Global supply chains were optimized for efficiency over resilience in an era of American global supremacy. That structure has now proven brittle in the current era of strategic competition.
America's current structural weakness against supply disruptions impairs its geopolitical position and gives U.S. adversaries a tempting target. Earlier eras of American policymakers recognized that maintaining economic stability at home was part of advancing our national security abroad. In a new era of intense competition, the federal government should follow that example and create the state capacity to ease the disruptions that lie ahead.
Sameera Fazili is a senior fellow at the Vanderbilt Policy Accelerator. She previously served as an economic adviser to President Joe Biden, where she led supply-chain policy at the National Economic Council. Joel Dodge is the director of industrial policy & economic security at the Vanderbilt Policy Accelerator. As an attorney, he previously practiced public-interest law and constitutional law.
More: Oil settles at highest price in over a week, as supplies 'are getting emptier each week Hormuz stays closed'
Also read: The Iran war is jacking up fertilizer prices and forcing farmers to make tough calls. 'If I guess wrong, I lose the farm.'
-Sameera Fazili -Joel Dodge
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 03, 2026 17:32 ET (21:32 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments