Federal Reserve Bank of Kansas City President Jeffrey Schmid argued on 16 July 2026 that policymakers should cease excluding food prices from core inflation measures for setting monetary policy. The proposal challenges a decades-long consensus and could lead to a more hawkish policy stance if adopted. Food price volatility has historically been its main justification for exclusion.
Context — why this matters now
Core inflation, which strips out food and energy to gauge underlying price trends, is a cornerstone of modern central banking. The Federal Reserve officially targets headline Personal Consumption Expenditures (PCE) at 2% but heavily weights core metrics in its decision-making. The practice of excluding food dates to the 1970s, when oil shocks created extreme volatility.
Recent supply chain disruptions and climate-related agricultural shocks have increased food price persistence. The core PCE index rose 2.6% year-over-year in May 2026, while headline PCE including food and energy was 2.9%. This 30 basis point gap demonstrates the current differential. Schmid's argument centers on food no longer being a transient source of inflation.
Data — what the numbers show
Food inflation has consistently outpaced the broader core index for three consecutive years. The food-at-home component of the Consumer Price Index (CPI) increased 3.1% year-over-year in June 2026. This compares to a 2.8% increase for core services and a 2.3% rise for core goods.
The 10-year breakeven inflation rate, a market-derived measure of expected inflation, traded at 2.41% on 16 July. The 5-year breakeven rate stood at 2.38%, indicating sustained investor expectations above the Fed's target. Schmid's analysis suggests current policy may be underestimating persistent inflationary pressures by 20-40 basis points due to the exclusion.
Food represents approximately 13.4% of the total CPI weighting and 8.2% of the PCE index. The table below shows the divergence between core and headline measures over the past year:
| Metric | May 2025 | June 2026 | Change |
|---|
| Headline PCE | 2.7% | 2.9% | +0.2% |
| Core PCE | 2.5% | 2.6% | +0.1% |
| Food PCE | 3.2% | 3.4% | +0.2% |
Analysis — what it means for markets / sectors / tickers
A shift to include food in core inflation would create immediate repricing in interest rate futures. Markets would price in fewer rate cuts and potentially additional hikes, particularly damaging to rate-sensitive sectors. Homebuilders (ITB) and technology growth stocks (QQQ) would face headwinds from higher discount rates applied to future earnings.
Consumer staples ETFs (XLP) with pricing power could benefit from institutional recognition of sustained food inflation. Agricultural commodities (DBA) and fertilizer producers (MOS) might see increased investor interest as food prices gain formal policy importance. The proposal faces significant opposition from economists who argue food remains highly volatile due to weather patterns and global supply chains.
Futures markets currently price a 65% probability of a rate cut by December 2026. Institutional investors are positioned for easing, with net long positions in Treasury futures near yearly highs. A paradigm shift toward including food inflation would force rapid covering of these positions.
Outlook — what to watch next
The next FOMC meeting on 28 July provides the first opportunity for other members to address Schmid's proposal. Fed Chair Powell's press conference will be scrutinized for any reference to composition of inflation measures.
The August CPI report on 13 September represents the next major data point for food inflation trends. A reading above 3.5% for food-at-home would strengthen Schmid's argument for persistence. The 10-year Treasury yield breaking above 4.5% would signal bond market concern about more restrictive policy.
The Jackson Hole economic symposium on 21 August traditionally features major policy announcements. This venue could host further discussion about redefining core inflation if other Fed presidents express sympathy with Schmid's position.
Frequently Asked Questions
How would including food affect interest rates?
Including persistently high food inflation in core measures would likely keep official interest rates higher for longer. The Federal Reserve would be less likely to cut rates with a core inflation measure that runs 20-40 basis points higher than current readings. This could add 1-2 additional quarter-point hikes to the current cycle.
What is the historical precedent for changing core inflation?
The Fed changed its primary inflation gauge from CPI to PCE in 2000 after a multi-year review process. The Consumer Price Index had been the benchmark since World War II, but the switch reflected concerns about measurement accuracy. Such changes typically require 2-3 years of research and committee deliberation before implementation.
How do other central banks treat food prices?
The European Central Bank monitors multiple inflation measures including headline HICP which contains food. The Bank of England targets headline CPI including food and energy, though it publishes analysis of core measures. The Bank of Canada explicitly excludes eight volatile items including fruit, vegetables, and gasoline from its core measure.
Bottom Line
Schmid's proposal to include food prices in core inflation measurements threatens to upend market expectations for Federal Reserve policy easing.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
