Chicago Fed President Austan Goolsbee said Monday that U.S. inflation may have moved beyond the tariff and energy price shocks of the past 18 months, with strong demand now also pushing up prices, potentially requiring the central bank to raise interest rates at a faster pace.

Speaking in London at the Official Monetary and Financial Institutions Forum and later to reporters, Goolsbee noted that the inflation climb over the past 18 months was initially attributed to tariffs and then to oil price shocks. Policymakers had been inclined to "look through" these supply-side issues, refraining from raising borrowing costs in hopes they would fade on their own.

But this supply-driven inflation is showing persistence, Goolsbee said. He added that there is evidence strong demand is now compounding the problem—booming investment in artificial intelligence may be pushing prices higher in broader ways, while stubbornly high services inflation suggests cost pressures are not solely the result of ongoing oil price shocks.

"If the main story is that it comes from overheated demand, I think the implication is that the interest rate response would be more aggressive and more front-loaded," he said. Based on recent data and conversations with business contacts, "we increasingly have a sense that... part of it may be coming from overheated demand."

"If demand is overheated, there is no ambiguity about what the Fed needs to do," Goolsbee said when discussing the possibility of higher rates, pointing out that the scale of AI investment may be "spilling over its own track and pushing aggregate output above what the economy can absorb."

The Fed raised its policy rate by a quarter percentage point last week following a two-day meeting. At the post-meeting press conference, Fed Chair Warsh emphasized the strength of domestic consumption, business investment, and other aspects of the economy's demand side. Policymakers also removed from their policy statement the language attributing elevated inflation to "supply shocks that have raised prices in some sectors, including energy," replacing it with a statement that inflation "remains elevated."

The Hard Road Ahead

Goolsbee said the split between demand and supply factors currently driving inflation remains an open question, and he is open to the possibility that improving supply conditions could still lower prices without further action—or even pave the way for rate cuts later. However, he also noted that the lesson since the COVID-19 pandemic is that supply shocks, which theoretically should only have temporary effects on inflation, have proven more persistent, meaning central banks may not be able to simply look through them when setting monetary policy.

The standard approach is to ignore supply shocks on the assumption they largely self-correct, as industry output eventually rebounds after shortages or bottlenecks emerge.

"Oil, tariffs, and commodity prices—forecasters spent over a year repeatedly pushing back the point at which inflation was supposed to peak and decline... That is not a reassuring pattern," Goolsbee said. "We need evidence that these shocks are indeed fading, otherwise it is hard to see a credible path back to 2% inflation—and even harder to justify continuing to look through."

The Fed's inflation target is 2%. The personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, rose 3.7% year-over-year in July, showing little recent improvement.

"In this environment, the only way back is the hard road"—meaning raising interest rates and accepting the risks to growth and employment as the economy slows accordingly. Goolsbee is not a voting member of the Federal Open Market Committee (FOMC) this year. On Monday, he did not comment on last week's meeting outcome or his own monetary policy outlook.