• The U.S. Bureau of Labor Statistics said Tuesday that inflation rose at an annual rate of 3.1% in January, contrary to most expectations of 2.9%.
• Inflation has remained stubbornly above 3% since its peak under President Joe Biden, and economists question whether current policy will allow inflation to reach the Federal Reserve's goals. .
• “Right now, disinflation appears to be continuing, but there have been many bouts and starts and occasional changes in direction,” Peter Earle, an economist at the National Bureau of Economic Research, told the Daily Caller News Foundation. Told. “Reducing annual inflation to the Fed's current target of 2% will be a slow, bumpy, and uncertain process.”

Year-over-year inflation in January did not fall below 3%, falling short of economists' expectations, and experts are speculating whether the Fed's inflation target is achievable under current conditions.

The January consumer price index (CPI) released on Tuesday was 3.1% from a year earlier, down from 3.4% in December but well above expectations of 2.9% and the Federal Reserve's target rate of 2%. Experts interviewed by the Daily Caller News Foundation say there is disagreement over whether inflation is truly moving toward the Fed's goal, with some economists saying they don't expect inflation to fluctuate widely. While some see that as unpredictable, other economists point to factors that could keep inflation near 3%. (Related: U.S. stocks fall after inflation beats expectations)

“The Fed bases some of its estimates on the concept of the natural rate of interest,” Peter Earle, an economist at the National Bureau of Economic Research, told DCNF. “The natural rate of interest is a theoretical concept that describes the interest rate at which the supply of savings equals the demand for investment in a fully functioning, stable economy with stable inflation and full employment. It is an equilibrium concept. However, of course However, since that rate cannot be directly displayed, its value is estimated. Not only that, whatever that rate is, it is not static and is constantly changing. Equilibrium is a concept in economic models. Yes, but rarely seen in the real world.”

natural rate the purpose This is to determine what level the Fed should set the federal funds rate to combat inflationary pressures by tightening credit conditions and, in turn, restraining the economy. The federal funds rate currently ranges from 5.25% to 5.50%, the highest rate in 23 years, in an effort to curb inflation, which peaked at 9.1% in June 2022.

“There is likely a natural rate of interest, but figuring out what that natural rate is…is not that easy,” said Norbert Michel, vice president and director of the Center for Finance and Financial Alternatives at the Cato Institute. he told DCNF. “Inflation is generally trending down, so we can say it's 'trending towards 2%,' but it's not so easy to predict how quickly it will get there.”

From 2012 to 2021, the CPI was generally less than or around 2%, but then, starting in March and April of 2021, inflation began to rise rapidly. according to to the Federal Reserve Bank of St. Louis (FRED). Inflation has slowed rapidly since its June 2022 peak, reaching around 3.1% year-on-year in June 2023, and has remained stubbornly above 3% since then.

Ladies, this Valentine's Day, realize that as long as “temporary” inflation continues, you're the guy who's going to stick around. pic.twitter.com/cdGQIeg4DQ

— Dr. EJ Antoni (@RealEJAntoni) February 14, 2024

“Right now, it looks like we're continuing to have disinflation, but there are many bouts and starts, and sometimes there are reversals in direction,” Earl told DCNF. “If you look at the 1980s, despite Fed rate hikes, inflation fell from incredible highs to lows between 2% and 3%, then returned to above 4%. It was only occasionally below 3% for the rest of the decade, from the mid-to-late 1980s. Bringing annual inflation down to the 2% range, the Fed's current goal, will be a slow, bumpy, and uncertain process. ”

According to FRED, the United States experienced even more extreme inflation starting in the 1970s, reaching a peak of more than 14% year-on-year in March 1980. The federal funds rate at the time was set It rose to more than 17% in April 1980 and more than 19% in June 1981, leading to a rapid decline in inflation and ultimately a recession.

Some economists believe that current federal spending rates and government policies related to the money supply will continue to promote inflation, raise the neutral interest rate, and are unlikely to reduce inflation without further rate hikes. . The US national debt reached $34 trillion for the first time just before the end of 2023, after adding more than $800 billion in new debt in the fourth quarter alone.

“Those who say inflation is trending toward 2 percent clearly haven't looked at any of the available data,” said E. J. Antoni, Grover M. Kennedy Fellow at the Heritage Foundation. “That shows we are moving steadily towards 3%.” Herman Center on the Federal Budget told DCNF. “We’re there, and there’s no sign of a significant decline anytime soon. It’s increasing while we’re allowing it.”

The disappointing CPI report has led more investors to bet on a “no-land” scenario in which inflation remains high but economic growth remains strong, threatening factors such as real wages, which have difficulty keeping up with inflation. Investors and the Fed continue to hope for a soft-land scenario in which inflation is brought down to the target range without triggering a recession.

“I want to remind everyone that for years before the Great Recession and for many years after the Great Recession, the United States was below the 2% target,” Michel told DCNF. “Perhaps we should ask ourselves whether the Fed can accurately achieve its goals.”

The Fed did not immediately respond to a request for comment from DCNF.

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