The Fed risks looking backwards on inflation

• In central banking, as in ice hockey, the goal is to skate to where the puck is going. That is, you're not trying to set the policy that's appropriate to the past, but rather to properly calibrate policy for the economy of the future.

Driving the news: Forecasters expect the June CPI numbers to show a scorching 8.8% inflation rate over the last year, which would be the highest since 1981.

• Even core inflation, which excludes food and energy, is expected to have risen 0.6% in June alone, far above levels the Fed views as acceptable.

Anything close to that level will amount to a green light for another 0.75 percentage point interest rate increase in two weeks.

• If it comes in surprisingly high, recent experience suggests it could make Fed leaders consider raising rates even more than that. Recall that the last CPI reading, just five weeks ago, triggered a surprise policy pivot to raise rates by 0.75 points at the June FOMC meeting.

State of play: Chair Jerome Powell has made clear he isn't ready to relent on rate increases until actual month-to-month inflation has fallen and stays low. Forecasts alone are not enough, especially after a head fake of falling inflation a year ago.

• "What we want to see is a series of declining monthly readings for inflation," Powell said at last month's news conference. "Ultimately, we're not going to declare victory until we … really see convincing evidence, compelling evidence, that inflation is coming down.
• "Last year, inflation came down over the course of the summer and then turned right around and went back up. So I think we're going to be careful about declaring victory," he said.

The risk: This focus on inflation in the recent past could mean ignoring signs that inflation is already on track to come down.

• Commodity prices have fallen, as have shipping costs. The rate of future inflation implied by bond prices has dropped precipitously. Wage growth has moderated.
• Futures markets now are pricing in a likelihood the Fed will have to reverse course and cut rates next year.

Between the lines: Fed leaders' incorrect call last year that inflation would be transitory has left them with a credibility problem they're trying to solve with a tone of resolute determination to lower inflation.

• The hazard now is that in an attempt to restore its credibility, the Fed ends up pushing rates higher, faster than is strictly needed to bring inflation down.

The bottom line: The economy could pay the price for last year's policy mistakes.

Go deeper: White House braces country for hot consumer inflation report