As a member of the Tampa Bay Buccaneers, Tom Brady was the defending Super Bowl MVP the last time inflation in the United States was less than 2%.
February 2021 was the month. Tom Brady, a legend in the NFL, had just won the final of seven Super Bowls. Jeff Bezos, the creator of Amazon, announced his resignation as CEO. And millions of individuals were receiving an experimental COVID-19 vaccination.
Additionally, it was the last time that Americans were not alarmed by price increases and the last time when U.S. inflation was below 2%.
The country’s inflation overseer, the Federal Reserve, is on the verge of an unsettling milestone. It will be five years since the inflation rate fell below the central bank’s 2% objective when top officials convene in Washington, D.C., this week.
Is it possible for the Fed to bring back and maintain a period of extremely low inflation in the United States? Although the majority of economists think a 2% rate is achievable, there are significant doubts about how long it will take to reach and if the Fed can maintain it at that low level.
Diane Swonk, chief economist at KPMG US, stated that “given how long inflation has persisted, there is a legitimate debate on the Fed’s inflation-fighting credibility.”
The Fed has some formidable obstacles as well. The pandemic’s aftershocks are still being felt, new trade restrictions are being erected globally, there is a labor shortage, and interest rates—the primary tool used to control inflation—are a crude and ineffective tool.
The Fed and the American economy are at great risk. Increased inflation has numerous negative effects, including raising living expenses, lowering living standards, and making it more costly for businesses to invest and for households to borrow money. Every aspect of the economy is affected.
“We should never underestimate how much people hate inflation – and for good reason,” Kansas City Federal Reserve President Jeffrey Schmid stated. “Inflation is an economic thief.”
The legacy of COVID
One of the harmful effects of the coronavirus pandemic that started in 2020 is the five-year period of excessive inflation.
In order to prevent a recession, Washington injected trillions of dollars into the economy, with the Fed cutting interest rates to zero and the White House giving large sums to individuals and companies.
Due to ongoing disruptions that restricted what companies could produce, the end result was too much money chasing too few things. By mid-2022, the inflation rate had risen to 7.2%, a 40-year high.
In 2022, a delayed Fed that had initially been sluggish to identify the issue raised interest rates in an attempt to curb inflation.
The Fed even seemed tantalizingly near to meeting its 2% target by early last year, right before President Donald Trump began his second term. According to the central bank’s preferred inflation measure, the rate of inflation had decreased to 2.3%.
The Trump tariffs followed.
The president imposed high tariffs on the majority of products imported from the rest of the world, starting the largest trade conflicts in decades. The rate of inflation started to rise.
“I would argue that at the end of 2024, had policies not changed, it’s quite possible that we’d be much closer to 2% inflation,” Eric Rosengren, the former president of the Boston Fed, stated in a MarketWatch interview.
Inflation returned to 2.8% in November, according to statistics that was delayed due to the federal shutdown. According to economists, it will end at about 3% in 2025.
On January 28, during their first meeting of the year, Fed officials are anticipated to leave a crucial interest rate unchanged due to high inflation.
In a TV interview, former Dallas Fed chairman Robert Kaplan stated that they are likely to hold off on lowering borrowing charges until they have further proof that inflation is slowing down once more.
The effect of January
Fed officials may be waiting a long time. Since January is when businesses change their prices for the year, inflation may get even worse at the beginning of 2026. Numerous Wall Street DJIA SPX analysts anticipate a rise.
Andy Jassy, the CEO of Amazon (AMZN), stated in a CNBC interview that tariff-driven pricing increases are starting to manifest. Customers “will be starting to see more of an impact” as vendors begin to run out of the goods they hoarded before the taxes.
Nonetheless, the majority of prominent Fed officials and Wall Street analysts think inflation will decline in the second half of the year. They contend that a one-time price spike brought on the tariffs is now subsiding.
For example, Fed officials forecast that inflation will drop to 2.1% in 2027 and 2.4% this year. Inflation follows a similar trajectory according to numerous private sector projections.
Three dynamics, according to Neil Dutta, head of economics at Renaissance Macro Research, are likely to push inflation down this year: cheap oil, subdued labor costs, and a slower increase in rents and property prices that is more in line with the historical average.
“The three primary conduits for sustained inflation are housing, labor and energy,” Dutta stated. They are all moving in the proper direction.
However, there are still many areas of the economy where inflation is present, and other economists believe it will take longer to reduce inflation.
Omair Sharif, president of the well-known research firm Inflation Insights, highlights the growing expense of medical care and transportation services including auto insurance and auto repairs. For most families, these are significant costs.
Increasing rates of inflation?
It is also not generally believed that inflation will return to 2% very soon.
According to some well-known economists, the effects of the Trump tariffs and the White House’s immigration crackdown are still being felt. According to them, inflation will probably continue to rise before it begins to decline once more.
In a widely read article, prominent economists Adam S. Posen and Peter Orszag argue that inflation may worsen.
They point to the Fed’s cheap-money policy, increasing labor costs, the lingering effects of tariffs, and excessive government expenditure during an election year. A decrease in immigration will result in a smaller labor pool and may compel employers to increase pay in order to draw in workers.
“We think it is more likely that inflation will surprise to the upside -potentially exceeding 4% by the end of 2026,” they stated. Orszag is the CEO of the financial company Lazard, while Posen is the president of the Peterson Institute for International Economics.
Controlling is difficult.
However, the majority of economists still believe that a 2% inflation rate is a reasonable and attainable target, regardless of how long it takes. In order to demonstrate to the public its commitment to combating inflation, the Fed first set an explicit target in 2012.
Simply put, economists don’t think the Fed can maintain it there.
“Is 2% feasible? Yes, it is possible. Of course. But perhaps not consistently,” stated Luke Tilley, a former Fed official and head economist at Wilmington Trust.
Why? Controlling inflation is challenging, particularly in the short term.
Interest rates are the Fed’s primary instrument for controlling inflation because raising them tends to slow the economy and lessen the pressure on prices to rise. However, interest rates are a blunt instrument, and raising borrowing costs may not begin to curb inflation for some months.
Furthermore, the Fed has little control over the causes of inflation spikes. For instance, the 2022 Russian invasion of Ukraine increased the cost of food and oil, which made the worldwide inflation spike worse.
Richard Moody, chief economist of Regions Financial, stated, “If you reach 2% inflation, you are not going to stay there.”
Therefore, the Fed’s best chance is to reduce inflation and limit yearly price rises to a steady and limited range.
“Economists have a hyperfocus on 2%,” Tilley stated. “Anything from 1.5% to 2.5% – as long as it stays in the band – it’s pretty good.”
There will be no price alleviation.
Will this kind of achievement, if you will, reassure nervous Americans who have been irritated by years of price increases? Most likely not.
Does that imply a decline in prices? “No, they are simply growing more slowly,” Moody stated.
The financial burden on households who are frequently paying prices for necessities that are 30% or more higher than they were five years ago is not alleviated by even a slower rate of inflation.
“That has made it very difficult for a majority of households,” KPMG US’s Swonk stated.
For Americans, particularly younger generations who have never experienced a period of high inflation before, it is a tough pill to swallow.
For example, between 2010 and 2020, prices increased by an average of only 1.5% year, and the price of essential necessities, like groceries, actually decreased. Inflation was simply not a concern for people.
In fact, the rate of inflation was so low that Fed officials believed it was too low. They were concerned that it might develop into deflation, which was a serious economic problem during the 1930s Great Depression.
Those concerns have long since vanished.
