The Federal Reserve is facing a major challenge because high commodity prices, especially oil, have produced high headline inflation. But the Fed should not overreact.

The Consumer Price Index (CPI) last month rose more than 5% over a year earlier, way above a rate that is consistent with price stability. At the same time, the federal-funds rate is at 2%, so the real interest rate on federal funds -- the interest rate adjusted for inflation -- has turned very negative.

Will...